Launching a new business is exciting and daunting in equal measure, there’s a lot to get your head around. But if there’s one thing to focus on, it’s your finances.
Knowing your financial outlook will help you to make informed decisions and ensure your business is around for years to come and one of the best ways to get to grips with this is to create a business budget. Put simply, a budget can help you see around corners which means you can avoid unexpected expenses or cashflow issues from cropping up and foiling your plans.
A budget supports your business plan by providing a future snapshot of your projected business position. It sets out the costs associated with running the business and the revenue that the business brings in and helps to identify the business’s non-negotiable and negotiable expenses.
As CEO and practice manager of Melbourne’s Bluebird Accounting, CPA Liz Moore has worked with countless new business owners over the past decade and is often the first port of call for people as they set out on their new venture.
Liz explains that a budget can help you spot potential financial roadblocks in your business before they mushroom into something bigger. “Having a budget in place helps you make confident decisions about your business. It can also help you to determine and work with expenses that are a necessity for keeping your business healthy business and ensuring you are a responsible operator,” she says.
What you include in your budget depends on the type of business you run—for example, whether your business is service- or product-based—but some of the possible line items in your budget might include:
In addition, you can further categorise your expenses into three key areas:
By tracking the revenue and costs of your business, your budget will provide you with insights into how you expect your business to run and how it is expected to perform financially. It will also reveal whether cuts are needed to improve your financial performance.
As Liz explains “A budget is a snapshot of how you expect to perform in line with your business plan. You can adjust and flex your budget, so it can let you know whether you’ve got enough fat in the business to purchase new equipment or hire new talent.”
Many business owners will simply use an Excel spreadsheet to manage their budget, but accounting software packages such as Xero or MYOB also offer budgeting capabilities.
Liz recommends that new businesses implement the accounting software from the beginning, as you’ll have greater financial transparency and oversight of your data. This is particularly important if you plan to sell your business later down the track.
Once you have all the important items in place, your budget will allow you to generate a future profit-and-loss report and this is where you can gain real insight into your forecasted position. If you have more revenue coming in than costs going out, the good news is you’re making a profit. But if it’s the other way around, you’re making a loss. A loss is relatively normal in the early days, but it isn’t sustainable over the longer term.
If you want your business to create a profit over time, it’s crucial to be realistic about the numbers in your budget. If in doubt, be conservative and overestimate your expenses and underestimate your projected revenues.
If you’re not sure what to do, it can pay to talk to a professional. Business owners sometimes think that asking their accountant for advice can be expensive but missing out on professional advice can cost significantly more.
“The right accountant can make all the difference. Having someone that can articulate and explain the position you’re in without feeling intimidated is a huge asset for any new business owner,” says Liz.
Budgeting is not a set-and-forget task—instead it requires regular updating and analysis. While the time frame for each business is different, this typically occurs on a monthly, quarterly or annual basis.
Making time to analyse your budget monthly, for instance, can help you to spot seasonal expenditure and earning patterns so you can plan for quieter times, or ramp up for busy months.
Meanwhile, updating your budget with actual figures month-on-month as your business progresses can help you to make accurate forecasts for the year ahead. This can help you identify whether changing prices or adding a new product could be a good strategy to grow your business.
“There can be a radical difference between actual and projected revenues and expenses due to unforeseen expenses or additional earnings, such as gaining or losing a major client, or hiring additional employees,” Liz says.
“A budget is also a great springboard into cashflow forecasting, which enables you to keep on top of your bills. Forecasting gives you greater clarity about when you will receive the income outlined in your budget and helps you determine when you need to pay outgoings. Additionally, it provides transparency to lenders to determine if you can meet loan repayments,” Liz explains.
The bottom line is that if you are thinking about launching a new business, you need to commit to a budget.
“Don’t be mistaken in thinking you don’t need a financial plan. Budgeting and cashflow forecasting is an essential part of a wider business plan and is necessary for all new businesses. It will help to get you off to a flying start,” Liz says.
As a new business owner, it can be easy to get caught up in everything you need to do to ensure your business will be a success. Having a budget in place allows you to see the bigger picture and helps you to make decisions about your business with confidence.