Why is budgeting important?

It may sound obvious, but the main reason why small businesses fail is because they lose control of their finances. So if you want your business to last, you need to take care of your finances every step of the way.  

You can do this by creating a business budget, which outlines the current state of your finances (including income and expenses) as well as your long-term financial goals.

You’ll also use your business budget to make sure you can meet your current financial commitments (and have money for future commitments if you want to grow your business). Business planning doesn’t have to be complicated – but it’s important to get everything down in writing before you begin. Your budget will play a key role in making sensible financial decisions for your business, so it should be one of the first tasks you tackle. Then throughout the year you can monitor your budget and if things change, you can account for them when you make your next plan.

How do I put together a business budget?

Decide on your budgeting tools 
If you’re just starting out and want to keep your costs down, there are plenty of free business budgeting templates online. If you do invest in some accounting software, it will often have a built in budgeting tool – so take full advantage!

Look at your figures 
Now you need to account for all your incomings and outgoings so you can balance your books. Make a list of all of your fixed costs (the costs that remain the same regardless of how much business you do – like lease or rental payments, insurance, and interest payments) and a list of your variable costs. Variable costs are those that change as your income changes: so things like materials, travel expenses, light and heating costs. Everything you spend money on needs to be accounted for so that you can create an accurate estimate of your income and outgoings for the year. 

Monitor regularly 
Now it’s time for the fun (we may be stretching the definition of fun) part: you’ll need to monitor your budget against the actual figures and investigate any variances (that's the difference between the budget and the actual cost). Investigating the variances can highlight what you've done well so you can do it again, or what you've done badly – to help you avoid doing that again.

You can create a budget for the year, but if you’re a seasonal business (for example, an ice cream shop) or just starting up, then a month by month or quarterly analysis is going to give you a much more accurate idea of how your business is doing. Remember to keep your budget realistic and conservative – estimate low in terms of income, and high in terms of expenses so you reduce the chance of running out of money. 

An important part of business budgeting is setting your fees and prices – it can be a bit of a minefield, so do your research. If you set your prices low to undercut competitors, you could be left scratching around for a profit. When you're budgeting your income, make sure you build into your profit margin the costs of delivering your products or services. That might be tricky to estimate if you’re in retail or selling a service that combines materials and labour. If you provide a service, it’s a bit easier to budget for your time and expertise. 

One word of advice: be aware of your competitors, but don’t build your prices or rates on theirs. You don’t know all the ins and outs of their accounts, and your budget might be totally different! 

What costs do businesses have?

These can be divided simply into your fixed costs, and your variable costs. Your fixed costs include things like your rent or mortgage, any business rates, your phone and broadband bills – basically, the regular costs you know you’ll be paying every month. If you pay business insurance, or need professional indemnity insurance because your business offers professional advice (like an accountant or lawyer) then these are fixed costs, too. 

Your variable costs include all your other business expenses – from travel and marketing costs to materials and labour. You can read more about what counts as a business expense here. Variable costs are costs that change as the quantity of the goods or services you provide change. That’s why it’s so important to keep an eye on your variable costs as your business grows.  

How do I keep on top of my cash flow? 

Before we answer that, what IS your cash flow? Cash flow is the total amount of cash being transferred into and out of your business. Businesses can fail even if they’re profitable on paper – if they don't get paid on time, they can quickly run into debt. Look after your cash flow by staying on top of your billing - the money that’s owed to you after you’ve provided goods or services. Try to collect payments as soon as you can, use online payments if possible as they’ll reach your account quicker than a cheque or a cash payment you pay in at a bank counter. 

Be aware of your credit terms – if you have 30 days interest free credit before a payment is due, pay towards the end of the 30 days so you have as much time as possible to accrue the money you need. Take advantage of credit terms from your suppliers, making careful notes of every due date so you’re never charged late fees. You might find it easier on your cash flow if you ask for deposits on larger contracts, or stage payments to spread your upfront costs. 

If you’re a new business, you can look after your cash flow by leasing rather than buying assets. If you need an expensive piece of equipment to do your job, monthly rental payments will put your cash flow under less pressure than a large one-off payment. A lot of people also take advantage of a business credit card to delay costs – some cards offer two month payment terms, which extends the amount of time you have to pay your bills while you’re waiting for payments to come in. 

Setting your own credit terms and payment requirements is important, too. Don’t feel you have to offer 30 days credit when you’re first in business - see if your customers will accept one week. If you’re only asking for payment after the job is done (like most tradespeople) then payment should be immediate – as soon as you’ve completed the work. Think of retail, those payment terms are immediate! Then as you grow and your cash flow becomes more established, you can offer better payment terms to offset your competitors 

What tools can help plan my budget?

The most useful tool when you create your business budget is a simple budgeting template – they tend to have exhaustive lists of all expense categories, so you can account for everything. There’s some excellent budgeting software out there; you might not want to pay for anything extra when you’re starting out, but it’s a good investment and using software makes budgeting less of a faff. Remember, your time is money – especially as a small business owner! One useful trick is looking at the published accounts of larger companies in the same industry on Companies House, so you can see the types of expenses they incur that you may have overlooked. Also, don’t be afraid to ask an accountant for professional advice at any stage of your budget planning – it could save you money in the long run. 

Can I plan a budget in Excel?

Absolutely – Excel is an easy-to-use tool for business budgeting, and it’s an industry standard for all accountants. That means you can easily share your budget with your accountant when you’re ready to do your tax return. Just make sure you use a decent Excel template for your budget, there are plenty of them online that you can download for free.