As a small business owner, you no doubt understand the importance of a budget in keeping your expenses under control and informing your business decisions.
What you might be less knowledgeable about is the process of making one, especially if you’re still a new business.
Not everybody has a head for numbers, and there’s nothing wrong with that.
Struggling with your business budget? Bruce Edmunds & Associates is a small business accountant that gives you a crash course in business budgeting.
Budgeting 101: a small business accountant explains basic budgeting terms
1) Start from the bottom and work your way up: calculate your net profit
If you have difficulty wrapping your head around your business budget, here’s a piece of advice: instead of starting off with how much you expect to spend, approach your budget with a goal for much much profit you’d like to make.
There are a couple of reasons we suggest this: firstly, nobody can tell the future. And secondly, it’s more straightforward, plain and simple.
By starting with an idealised profit, you have a solid number to work backwards from instead of guesses.
2) Understand the difference between operating expenses and direct expenses
The next step is to list all of your expenses.
Let’s start with operating expenses.
Simply put, operating expenses are the expenses that aren’t directly involved in your production. These are your overheads – even in the complete absence of business activity, these will continue to accrue:
- Rent and utilities
- Salaries (for indirect labour)
- Advertising expenses
- Insurance payments
Next, we have direct expenses.
If the name didn’t explain it all, these expenses directly contribute to making, delivering or providing your goods and services:
- Materials and ingredients
- Salaries (for direct labour)
- Supplies and tools
- Transport and freight costs
Why does this distinction matter? It’s simple: it helps you identify areas where costs can be reduced.
Armed with extensive lists of expenses, you’ll know which costs are impossible to avoid and which ones may be reduced.
In our experience, direct costs are harder to bring down since they fluctuate so much with business activity.
Additionally, you’ll also have a much more accurate idea of how much you’ll need to budget towards various individual expenses.
3) Calculate how much revenue you’ll need to meet your goals
Now that you have your total expenses (both operating and direct), you can figure out how much you’ll need to meet your net profit goals.
Here’s how to figure that out:
Desired net profit + operating expenses + predicted direct expenses
The resulting number is (approximately) how much revenue you’ll need to make.
Not only does this help you identify opportunities to bring down expenses, but it also provides an indication of how much revenue you’ll need to make to achieve your goals.
It’s important to evaluate your budget once everything is in place. Ask yourself questions such as:
- Are your numbers too optimistic?
- What was your target last year?
- How does the long-term trend look?
- Have you properly accounted for seasonal fluctuation?
- Are your direct costs on a realistic level of business?
- How often should you make budgets?
- Have you accounted for upcoming government initiatives?
These aren’t just good for scrutinising your budget – ideally, you should be evaluating every decision you make through this lens.
And don’t be afraid to ask our small business accountants for a second opinion either!
Choose the most appropriate type of budget
When making your budget, it’s important to ensure that you choose the most appropriate type of budget for your business.
Fixed budgets are the most common type of budget.
Otherwise known as static budgets, this method of budgeting involves predicting expenses and revenue at the beginning of a period.
Once these numbers are in place, they’re fixed.
Fixed budgets are significantly simpler to prepare, and are great options for businesses with stable expenses. They can also help businesses that need to closely watch their expenses.
However, they’re not perfect for every business. If your business has functions that hinge on business activity (for example, a complex bonus system or profit-sharing schemes), a fixed budget might not give you an accurate prediction of your spending.
If this sounds like you, then a flexible budget might be more appropriate for your business.
While more complex and more time-consuming, they allow for more tweaking and are more responsive.
For other businesses, longer-term budgeting and forecasting is a must. And that’s exactly what rolling budgets provide.
Instead of budgeting at the beginning of the month or year, rolling budgets are created with multiple periods in mind. This makes this type of budget perfect for businesses owners with a long-term outlook, or who face more unpredictable circumstances.
Seek support from our small business accountants
Call Bruce Edmunds & Associates today!
Whether you’re a new business or an established one looking to start the new financial year on the right foot, budgeting is one of a business owner’s most important responsibilities.
Bruce Edmunds & Associates has been helping businesses big and small with their business accounting needs since 1966.
And that includes budgeting assistance.
Our team of highly-qualified accountants are happy to provide you with advice. Using our wealth of knowledge, we’ll help set a budget that’s accurate, relevant and which brings your business expenses under control.
In addition to budgeting, we also provide a wide range of business and personal accounting services, including:
- Business tax returns
- BAS and IAS accounting
- Personal tax returns
- Financial planning
- Superannuation services