Budgeting for success.


6th December, 2021

Small business budgeting: Why you need one and what to include

Budgeting can be the difference between success and failure for a small business. Here, Nina Hendy speaks with local business owners and advisors for their tips and tricks.

Setting a budget has been an important part of the success for Parcelpoint.

In fact, budgeting has allowed the business to prioritise key projects that will have the biggest impact,” finance manager David Agius said.

“At Parcelpoint, we had a budget from the outset, because we knew it would really help us to plan and execute all the things we wanted in the future,” he said.

The small business, which offers a growing network of local delivery, pickup and return locations for parcel deliveries, pick-ups or drop off, is thriving.

But a budget can only be a guide, especially as a startup business that changes rapidly.

“We’re constantly trying new things, have been experiencing huge growth, onboarding new retail partners and had a recent capital raise,” Agius said.

“Flexibility in the budget allows you to add something that helps you pivot later on. Being a startup, things move super rapidly and the ability to pivot is paramount.”

What is a business budget?

A business budget is an outline, either in written or spreadsheet format, of the money your business will spend. You can plan it by month, quarter or year. It helps you forecast what your business profit might ultimately be.

Over time, a business budget will help you assess the difference between what you plan to spend and what you actually spend in a period of time.

Why should you create a business budget?

There are many reasons to create a business budget – and no good reasons to avoid creating one. Here are four important ones.

1. Set – and achieve – business goals

Budgets enable a business to accurately set goals and priorities for a month, quarter or year. Knowing how much you can spend on certain activities – and figuring out where the money is coming from – is key to planning your product or service offering.

2. Allocate expenditure

Creating a budget means you can identify what money is available and allocate expenditure to the activities that directly contribute to income.

3. Secure finance

A budget will also help small business owners understand how to fund the business during growth periods.

“Having a business plan and robust financial forecasts in place will help a business owner with any conversations they have with potential financiers,” says Scottish Pacific Finance senior executive Wayne Smith.

4. Keep an eye on cash flow

Scottish Pacific Finance senior executive Wayne Smith also says budgets are a great tool for predicting the financial implications of a business plan, provided your assumptions are realistic.

“A meaningful budget shows how delivering on your business plan will impact your cash flow. It should contain forward-looking financial forecasts including profit and loss, balance sheet and cash flow statements,” said Smith.

READ: Understanding cash flow for small business

What should a small business budget include?

The two main expense categories that your business budget needs to include are fixed costs and variable costs.

Fixed costs include things like:

  • rent or mortgage payments
  • insurances and licenses
  • car or equipment leasing

Variable costs include things like:

  • utilities like electricity, gas, phone and internet
  • costs of parts and raw materials
  • staff wages
  • vehicle expenses, like fuel and maintenance

READ NEXT: Business expenses guide for SMBs

How to create a small business budget

1. Tally your costs

To create your budget, put in actual or expected costs for each line item in your fixed and variable costs and add up what you’re likely to spend in the given timeframe (eg month, quarter, year).

2. Estimate earnings

Then estimate what the business is likely to earn in the same timeframe. When creating a business budget, you want to know what the ‘goal posts’ are, such as the final revenue or profit figure that you’re aiming for.

3. Put a value on your time

Some business owners find it hard to put a value on their time, or don’t pay themselves a wage.

There are some key differences between service and product-based businesses. Service businesses tend to not charge properly for overhead and support costs.

On the other hand, product-based businesses need adequate cash flow to re-order more stock and to cover associated business costs such as packaging, storage and distribution.

“Knowing how much it costs in goods, labour and associated costs per item is very useful after you’ve done a budget. This should be a natural progression from the information collated,” said Lynda James, accountant and business analyst from Valo Financial.

4. Calculate final profit

The final profit or revenue figure is like an ‘X’ on a financial map, and the strategies you choose are the pathways you’re going to take to get there, explains James.

“Before anything else, cash flow and profitability are the main consideration of a budget. Without either of these working well, a business cannot exist,” said James.

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Understanding your small business budget

Once the budget has been compiled, take a look at the data to understand:

  • The average cost per client
  • The average cost per product sold
  • The average revenue per client/product sold
  • What is left over each month after tax
  • What the last 12 months reveal about the budget for the year ahead

Segmenting data based on key income streams can help small business owners understand more granular detail about their business, adds accountant Amanda Fisher, who has helped hundreds of businesses understand their numbers.

“In MYOB AccountRight, you can use the ‘Jobs’ tab for each income stream.

“For a service-based business, segmenting may be separating specific types of services, or by contract if doing larger contract work,” explained Fisher.

For product-based businesses, you can segment by customer location, wholesale, retail or online sales.

“Once these segments are identified, all costs associated with the sales of each segment are also allocated to the ‘Jobs’ tab.

“This allows business owners to clearly see the revenue and costs for each segment, which allows for more accurate budgeting,” said Fisher.

Once you have historical information about the income and expenses for each segment, it’s easier to create a budget by referring trends and using that information for the budget, she added.

Bear in mind that a business budget is not just set and forget. You need to regularly compare your actual expenses against your budget. Be prepared to make adjustments if things aren’t working and learn from the areas that have been successful.

With the power of cash flow forecasting at your fingertips, business budgeting is a breeze with MYOB. Discover which product is best for the size and complexity of your organisation, and start a FREE 30-day trial today.