Getting your Figures in Order
You might have heard the saying ‘you have to spend money to make money’. More important still is figuring out where to spend it and where you’re making it.
A business budget helps you do both as smartly as possible. It’s both a roadmap for the future period and a gauge to how successfully you’re following it. It also helps determine whether adjustments need to be made.
The three basic things you want a budget to tell you are:
- How much money you have,
- How much money you need to spend to operate, and
- How much money you want to make.
Depending on the size, volume and other behaviours in your business, you might want to budget for a given period such as monthly or quarterly, but if you’re just starting, the Australian government tax year (July 1 through to June 30 the following year) is a good place to start.
A business budget will have two major components:
If you’ve been in business for a while, use the figures from the last period as a basis.
Consider whether any movements in your industry, your clients or your situation might impact on you making more or less in overall sales for the coming period. You can’t divine the future, so don’t worry about making some educated guesses.
If you’re starting a budget for a new business, you should be able to make some projections about how much you’ll make based on how much time you have to work on the business and the going rate for the good or service you offer. Err on the side of conservative – making more than you expect will make your budget look better and give you a morale boost.
Some costs are fixed and can be figured out easily. You’ll know how much computers or equipment costs, for example, or how much you’ll have to pay staff or lease premises.
Your business might need raw materials or an investment of your time or expertise, but nobody should know more about what they are than you, so you can paint a fairly accurate picture.
Other costs, however, are fluid and can come up because of changes in circumstances. Variable costs are hard to plan for by their nature, but once again if you know your line of business properly you’ll have a good idea of what might come up that you should account for.
Your projected sales and costs should go into a records system whether it’s a spreadsheet, accounts application or a paper-based ledger. The difference between the two, of course, is your profit.
The next step is to keep track of your actual costs and sales on an ongoing basis. However possible in your system (whether it’s paper or computer based), keep a record of actual sales and costs alongside the projected figures you’ve already worked out.
That will give your budget its most powerful capability – analysis. The differences between actual and projected figures will give you a more complete picture of what you should expect in business, and let you adjust your projections for the next period.
More importantly still, it will let you see where your money is going and where it is coming from, which will give you an insight into where you should be concentrating more of your energies or looking for efficiencies.
Add to that the fact that clearly-defined financials will help you if you ever need to secure finance to expand, and your budget might be the handiest tool you’ve got.
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