In the same way you currently manage your pool of money to pay family obligations including home, school, car, and health bills, a small business has the same challenges. Whether you realise it or not, you are using a budget every day.
Measuring the money coming in and going out in your business is vital to keeping the operations flowing. In fact, budgeting can:
- Ease your cash flow constraints.
- Reduce the financial stress in your life.
- Make it simpler to anticipate costs and avoid nasty surprises.
If you do not budget, how will you know if your business can afford a new employee, finance a new car, or invest in new technology, all while meeting existing everyday business financial commitments, like taxes, superannuation for the employees, and rent?
The most successful businesses budget their money and know exactly where it is being spent. They monitor areas to reduce costs, know exactly what they can afford, and know when to invest money in their business. They are in touch with and monitor their business numbers constantly—they budget.
Here are 5 basic budgeting tips for your business:
TIP 1: Run Reports to Discover Your Financial History
The accounting system you use is a wealth of information about your costs. You can run reports that will show you the history of the breakdown of your monthly or yearly costs so you can compare and see where your business is spending its money. This is a great starting point, and I encourage you to do this regularly.
TIP 2: Break Down Costs and Shop Around for Deals
Identify the cost areas as a percentage of where total costs are being spent. Then evaluate these and see if there are savings that can be made. Review and evaluate your insurance supplier, telephone supplier, or materials supplier. Make some time to do this, and shop around for a better deal.
TIP 3: Give More Accurate Job Estimates
Without a budget, you will never know if you are making a profit each time you quote for a job. Budgeting the costs of providing services or goods— including fixed and variable costs—is important. You’ll know the revenue needed to at least cover these costs and hopefully make a profit.
TIP 4: Watch for Government Taxes and Incentives
Be aware of the latest tax costs (such as the Australian Carbon tax) and incentives from the government that can save you money. For example, from 1 July 2012, Australian small businesses (with gross turnover of less than $2 million) will be eligible for a 100% tax write off for asset purchases costing less than $6500, and a $5000 up-front deduction for car purchases.
TIP 5: Forecast and Project to Plan for the Future
Project your costs by having a forecast budget for the next financial year and beyond. Use your accounting system to achieve this. You have historical data in your accounting system you can use as your starting point. You can also account for any plans you have in the coming year that might require extra funds.
If you do not know where you are going, and you are not measuring or planning, then how will you know when you have arrived?
Tracey Sharah | Founder and Director, Metro Accounting