How to create a budget (plus a free tool)

Do you know how much money you make? Or is it a case of “I don’t know – it depends on how the business is doing”.

Whether you are starting a business or growing, you need to know what you are trying to achieve within the business and qualify how you are going to reach your goals, then you can set a budget to help you reach your goals.

Setting goals that affect your bottom line or personal finances are often more motivational than setting a sales target.

This is not a glamorous job but necessary for your business – to control costs, identify problems and ultimately achieve profitability. Creating a budget should have an effect on your business … in particular it should enable you to:

  • Set challenging but achievable goals for the turnover of the company and the payments to you the business owner(s) and the staff you employ … you want to be clear on how success in the business becomes success in the team’s bank accounts
  • Plan for investment of profits into the ongoing growth of the company … be it investment in R&D, intellectual property, more staff, different skills, board members/advisors etc
  • Plan for tough times … knowing in advance where you would make cuts if revenues drop and what the markers are for needing to implement these tactics helps make it easier to do this if the situation arises
  • Manage the day to day costs … all the things that are almost invisible except when they are all added up … phone bills for those with international clients, travel in general, last minute couriers. These items can tell you quite a lot about bad business habits and offer the chance to cut costs without reducing the value delivered to clients
  • Manage the cash flow challenges that come with projects, temporary staff or product manufacturing … if you have prior warning of when the cash flow hole between needing to pay others and getting paid is likely to occur, then you can negotiate an overdraft or manage the chunks in which you pay/are paid
  • This is not an exhaustive list but will probably give you enough to be thinking about (i.e. if you’re not convinced by these reasons we don’t think you’ll do a budget whatever else we may say).

A budget is not written in stone – it is critical to be flexible and adapt to circumstances, have a plan B budget just in case. Indeed for those who come to enjoy excel spreadsheets (honest, some do) then we’d recommend doing an ‘optimistic’ and a ‘pessimistic’ version of both income and expenditure for the year. For those who are less keen you’ll find a ‘what if’ calculator in MyCake which allows you to use sliders and dials to set these assumptions, ne’er a spreadsheet in sight (though we think you should write a few things down as you do this otherwise you’ll forget).

I have laid out a few simple tasks to help you get control of your finances and make the numbers valuable.  You will also find a free tool to download at the end of the post to assist you.

TASK 1 – analyse the information you have to hand

  • Evaluate every penny going in and out of your business so you fully understand what is going on
  • Make sure costs are classified in correct budget lines so you have all the data in the right place
  • Look back through the last TWO years and pay special attention to fluctuations. What is your biggest sales month? When are the low periods? When do you hit an expense high? Where do you blow your money? What percentage increase have you seen in specific supplies, overheads and in your sales? If you are a MyCake user, not only can you run a bunch of reports on your own business , but the benchmarks will show you where you sit versus the best and worst in your sector.

TASK 2 – do a first pass at a budget

  • Create a base line budget as a guide to work from – start by separating your fixed and variable expenses
  • Fixed items include rent, debt interest, insurance and other expenses that cannot be avoided and are predictable
  • Typical variable items are salaries, materials, transport, and marketing. Don’t forget the associated costs – for example salaries should also include cost of hiring new people, benefits, NICs etc.
  • Do use last year’s books as the start point for creating the budget for the coming year. You can vary it to account for changes you plan this year as a next step.

TASK 3 – take a look at the top line

  • Your customers are the best source of information about sales projections – are your customers cutting back or growing? What are they predicting for the year ahead?
  • Examining your sales can be by customer or by product depending on how you operate
  • Remember that past sales, based on the booming economy or credit crunch, may not give the best prediction for the year ahead
  • Build a buffer into your budget to allow for fluctuating prices in materials or loss of a big customer
  • Estimate conservatively and create an average price you can apply through the year – eg basic monthly spend on travel or phone

TASK 4 – reconcile your costs and expenses

  • Look for relationships between specific expenses such as marketing and your top line so you know where you can save at short notice.
  • This also helps to plan a three month cash reserve to cover droughts in cash flow.

Having a budget allows you to be flexible.  You can see what the actual numbers are and if you are achieving your goals – it allows you to be able to make changes if you are missing or exceeding your goals. Monitor the budget at least once a month, make mini revisions and change your spending quarterly to make sure you’re on target to reach the goals.

Alternatively have a best case, worse case and happy medium budget so you can fall back or move up as necessary.

At the end of the day you may want to be able to compare your expenses to other businesses, via a professional association, to see how your spending compares to benchmarks in the industry. The more you can do to construct ‘norms’ for your company the easier it will be to compare these to the best in your sector.

MyCake has created an empty budget spreadsheet for you to use for your own business budget – click to download it: sales & cashflow. Feel free to email us if you have questions and please note that we accept no liability for the way in which you use this spreadsheet. I mean, we think it’s sensible, we’ve checked that the inbuilt calculations look right to, but no absolute promises!

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