Category: Budgeting

How to Create a Balanced Business Budget

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Creating a balanced business budget can seem like a daunting task, but it doesn’t have to be. There are a few simple steps that you can take to make sure that your budget is both realistic and achievable. We’ve put together a step-by-step guide to creating a balanced business budget so that you can take the guesswork out of the process.

Step 1 – Calculate Your Income

The first step toward creating a balanced business budget is to calculate your income. This may seem like a no-brainer, but it’s important to be as accurate as possible when estimating your income. After all, your budget can only be as balanced as the income that you’re bringing in. To get started, take a look at your past few months of financial statements and try to come up with an average monthly income.

If you’re just starting out, it’s important to be realistic about the amount of income that you can realistically expect to bring in. Don’t forget to account for seasonal fluctuations in your business’ income.

It’s also important to consider all of your streams of revenue. If you’re selling products, be sure to include both the cost of goods sold as well as any shipping and handling fees.

After you’ve calculated your income, it’s time to move on to expenses.

Step 2 – Fixed Costs

In order to create a balanced budget, you need to figure out what your business’s fixed costs are.

Fixed costs are those expenses that stay the same each month, such as rent, utilities, and loan payments. These are non-negotiable expenses that you have to pay no matter what.

Step 3 – Variable Costs

Variable costs are those expenses that fluctuate from month to month, such as inventory, shipping, and marketing.

The key to creating a balanced budget is to make sure that your variable costs don’t exceed your income. This can be a challenge, but it’s important to keep an eye on your spending in order to stay within your budget.

Your variable costs will increase along with volume of production. So if you sell more, you’ll send more. It is important to track your variable costs closely as your business grows.

Accounting software can help you track your income and expenses so that you can see where your money is going each month. This information can be helpful in creating a realistic and achievable budget.

Step 4 – One-Off Costs

There are always going to be one-time costs associated with running a business. These costs can include things like equipment purchases, website development, and trade show fees.

When budgeting for one-off costs, it’s important to consider both the short-term and long-term impact of the expense. For example, a new piece of equipment may be a large upfront cost, but it could save you money in the long run by increasing efficiency.

Step 5 – Consider Your Cash Flow

Another important factor to consider when creating a budget is your business’s cash flow. Cash flow is the amount of money that is coming in and out of your business each month.

It’s important to have a positive cash flow in order to maintain a healthy budget. If your expenses are higher than your income, you’ll need to find ways to cut costs or increase revenue.

There are a number of ways to improve your cash flow, such as offering discounts for early payment, setting up automatic payments, or offering payment plans.

Step 6 – Putting It All Together

Now that you’ve calculated your income, expenses, and cash flow, it’s time to put it all together to create a balanced business budget.

However, you can’t just create a budget and then set it aside. You need to revisit and review it regularly to make sure that it’s still accurate and on track.

As your business grows and changes, your budget will need to change too. Be sure to review it at least once a month to make sure that it’s still in line with your current situation.

Creating a balanced business budget is an important part of running a successful business. By taking the time to calculate your income and expenses, you can ensure that your business is on track for long-term success.

Project Cost Management – A Quick Guide

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Cost management is one of the most important aspects of any project. Without careful planning and monitoring, costs can quickly spiral out of control, leading to disastrous results in terms of the project itself and your business’ profitability.

In this blog post, we’ll review the basics of project cost management, including how to estimate costs, track spending, and stay within budget so that you can ensure that all of your projects are profitable.

What is Project Cost Management?

Project cost management is the process of estimating, tracking, and controlling the costs associated with a project. It includes both the direct costs, such as labour, materials and equipment, and indirect costs like travel and overheads.

Why is Project Cost Management Important?

Project cost management is key to success because it ensures that your project stays within budget. By carefully estimating and tracking costs, you can avoid cost overruns which can quickly eat into your profits.

Gathering actual data from past projects also helps you to create more accurate cost estimates for future projects, making them more likely to be profitable.

Resource Planning

One of the most important aspects of project cost management is resource planning. This involves estimating how many resources, such as labour hours or materials, will be required to complete the project.

In order to perform accurate resource planning, you need to create a clear blueprint of the time, resources and activities required to see the project through to completion. You must understand the long- and short-term goals of the project and identify any areas where there may be resource deficits.

Cost Estimation

After you have created a resource plan, you can begin to estimate the costs associated with each task. This includes both direct and indirect costs.

Direct costs are those that are directly related to the project, such as labour, materials, and equipment. Indirect costs are those that are not directly related to the project but still need to be considered, such as travel and overhead.

To estimate costs, you will need to consider the quantity of resources required, the cost of those resources, and any other associated costs. For example, if you are estimating the cost of labour for a project, you will need to consider the number of hours required and the hourly rate of pay for the workers.

Once you have estimated the costs for each task, you can add them up to get an overall estimate for the project. It is important to remember that cost estimates are never 100% accurate and there will always be some uncertainty.

As such, it is a good idea to create a contingency fund to cover any unexpected costs. Having a detailed resource plan in place helps you to see where costs may increase and allows you to make adjustments accordingly. For example, if you know that a certain task will require more labour hours than originally planned, you can budget for overtime or hire additional staff to complete the task.

Budgeting

After you have estimated the costs for the project, you need to create a budget. The budget is a document that outlines all of the expected costs for the project and how those costs will be paid. It also breaks down the project into stages, so that you know how much money you will have available at different points.

Creating a detailed budget helps you to track spending and ensure that you stay within your overall project budget. Once you have a solid budget in place, it’s time to get to work – and that means practicing cost control.

Cost Control 

Cost control is the process of monitoring and managing project costs. It involves tracking actual costs against the budget, investigating variances, and taking corrective action where necessary.

It’s important to closely track costs and compare them against the budget on a regular basis. This allows you to see where money is being spent and identify any areas where costs are exceeding the budget before things get out of control.

Once you have a good understanding of how much things are actually costing, you can start to make adjustments to keep costs under control. For example, if you find that labour costs are higher than expected, you may need to adjust the budget or find ways to reduce the amount of time required for each task.

Careful cost control will also help you to improve cost estimation and management in the future, because you will have a better understanding of the factors that impact project costs.

Summary

Project cost management is an important part of ensuring that your project is completed on time and within budget. By carefully estimating costs, creating a detailed budget, and practicing cost control, you can keep your project on track and avoid any unexpected surprises.

Quick Tips: Registering for Value-Added Tax (VAT)

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When first setting up your business, there are multiple decisions to make – and a key consideration will be whether to register the business for Value-Added Tax (VAT), the tax that’s added onto the price of certain goods and services.

When does VAT registration become mandatory?

When your business’s turnover reaches £85k over any rolling period of 12 months, it’s currently mandatory for you to register for VAT. Because of this, it’s important to keep an eye on your turnover and to start making plans for VAT registration as you get closer to the threshold.

Is it better to be VAT-registered?

Where your customers are VAT registered, you’ll always be better-off registering – as long as you don’t mind factoring in the minor administrative work that’s required.

As a VAT-registered business, you can add VAT to your selling prices without it actually costing your customers more – VAT registered customers just claim the VAT back from HM Revenue & Customs (HMRC). You can also reclaim VAT on your own expenses in the same way. If the administrative work is a concern, the flat-rate scheme is a more straightforward alternative.

What happens if my customers aren’t VAT registered?

If you’re a business-to-consumer (B2C) company, your consumer customer base is unlikely to be VAT registered. In this circumstance, if you charge your customers VAT, they’ll end up paying more for your goods/service – which could affect your competitiveness in the marketplace.

Think about whether this additional VAT cost is likely to have an impact on your sales. Then weigh that against the additional costs you’ll incur if you don’t register – and, as a result, can’t reclaim VAT on your costs.

Why would I register early for VAT?

Legally, you don’t have to register for VAT until you meet the £85k threshold. But some businesses operating below the registration threshold choose to register voluntarily.

Some companies believe being VAT registered makes the business look more substantial and professional. And some businesses will register to make use of the ability to claim back VAT on certain business expenses, especially if these are for significant assets.

Talk to us about registering for VAT

For a new business, even if you anticipate that your sales will go over the £85,000 registration threshold in the first year, there may be advantages in delaying registration until you have to. Equally, there may be benefits in registering even if you are trading below the threshold.

Tell us about your business plans and we’ll be happy to advise you on the best point in the business journey to register for VAT.

Taking out cash for Directors vs Sole Traders

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Every business owner needs to take cash out of the business at some point. But if you’ve just moved from being a sole trader to a limited company, you may get caught out by the different rules around withdrawing cash from the company.

Why are the rules different for directors and sole traders?

When you’re a sole trader, you and your business are one and the same legal entity. So taking cash out is a simple procedure. But as the director and shareholder of a limited company, you and your business are two separate entities – and that means that money in the business is no longer your personal money. It’s money that belongs to the limited company.

Do I need to keep my personal and business money separate?

Regardless of which way you operate, you should always have separate business and personal bank accounts. The business account should be used to deposit all funds from sales and other business income, and to pay for purchases and other business running costs.

As a sole trader, there’s no legal difference between your personal and business funds. The main reason for a separate personal bank account is to keep your personal expenses separate from your business expenses. So, rather than mixing up things like mortgage or house rental payments, groceries and household bills with your business expenses, you have two distinct accounts – one personal, one business.

If you need money for personal expenses, you just transfer it from the business account to your personal account – it’s all yours to do what you want with. Obviously, you need to leave enough in the kitty to pay suppliers when their bills become due. But, as a sole trader, there’s nothing to stop you draining the business account completely, if you want to.

How do I draw money out as a limited company director?

For a limited company, it’s a legal requirement to have a separate business bank account. Even if you own the company 100%, the money in the company bank account belongs to the company, it does not belong to you.

So, how do you take out money to live on?

There are four ways of taking money out of the limited company, and in each case you should do it by transferring funds from the company account to your personal account. Preferably you should make these separate transfers, even if they happen on the same day.

  • Claiming back your expenses – any business expenses that you’ve paid personally can be reclaimed. Your expense claim should include receipts or other documentation, and a description of what they were for.
  • Being paid a salary – you can opt to be paid a salary for your role. This salary is processed through your payroll system, with any PAYE and NI deducted. The net pay due should be transferred to you on the normal company payday.
  • Withdrawing a dividend – where there are sufficient after-tax profits available in the company, you can withdraw dividends. Paying yourself and your fellow directors a dividend requires some formalities, including board minutes and dividend vouchers.
  • Directors’ loans and repayments – if you’ve previously loaned money to the company, the loan can be repaid to you. Where nothing is due, the company can lend you money but there may be interest charged (or a taxable benefit may arise if no interest is paid). The company may also be liable for a 33.75% temporary tax charge (section 455 charge) if the loan is not repaid by the end of your company’s financial year.

Talk to us about taking out cash as a director

Withdrawing funds from your company for personal use takes some serious thought and planning. If not, you may well end up with an unintended overdrawn director’s loan account.

It’s important to remember that the company’s funds are not yours in the same way that a sole trader owns the funds in their business account. Getting professional advice as a director is the best way to manage your cash withdrawals from the business.

We’ll work with you to:

  • Decide the best split between salaries and dividends
  • Help with any board minutes and other documentation
  • Help ensure that your company’s bookkeeping records accurately and timeously reflect the movement of funds between you and the company.

Get in touch to talk about your cash requirements.

Hiring your first employee – things worth knowing

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Hiring your first employee is a big step as a business owner. It’s great that you’re ready to grow your business and delegate some responsibility in order to narrow your focus, but it’s also natural to be nervous about the process. We’ve compiled a list of the most important things to bear in mind when hiring your first employee so that you can prepare and make the right decision for your business.

#1 – Payroll

When you hire an employee, you need to put a payroll system in place to make sure that employees get paid the right amount at the right time. Otherwise, your staff won’t be with you for very long.

You will need to submit National Insurance contributions and PAYE tax where applicable. And may also need to set up a Pension Scheme.

#2 – Contracts

It’s important to have a written contract in place with all employees. This document should outline the employee’s job duties, hours of work, pay rate, and benefits. It’s also a good idea to include an exit clause in case the relationship between employer and employee doesn’t work out.

#3 – A Code of Conduct

When you’re operating solo, you don’t really need a code of conduct – you know how to behave. However, when you have employees, it’s important to have a code of conduct in place that everyone is expected to follow. 

This document should outline the company’s expectations for employee behaviour, both on and off the job. It should also include disciplinary procedures for employees who violate the code of conduct.

#4 – Management Skills

If you’re not used to managing people, it’s important to learn the basics of good management before hiring your first employee. This includes setting expectations, providing feedback, and creating a positive work environment.

This is an important part of your growth as an entrepreneur. Learning great management skills as early on in your journey as possible will set you up for success.  Especially as your business grows and you add even more employees to your organisation.

#5 – Hire Based on Attitude

You can teach new skills and provide experience, but you can’t change a bad attitude.

That’s why it’s important to take attitude into account when hiring your first employee. 

Look for someone who is positive and enthusiastic about their work, even if they don’t have a lot of experience. Employees who are keen to grow and develop their skills will prove immensely valuable to you and your company.

Of course, you may well be keen to hire an experienced employee, but still be sure to screen candidates carefully and pay close attention to their attitude.

#6 – Ensure That You’re Financially Ready

Hiring employees is a great way to grow your business, but you need to make sure that the timing is right.

In other words, make sure that you’ve got enough money in the bank before making this big decision. Once you have an employee on board, it’s important not to let them down by being unable to pay their wages on time.

If you’re not sure whether your business is ready for its first employee, consult with your accountant or financial advisor to get their opinion.

Final Thoughts

When it comes to hiring your first employee, there are a few things you need to keep in mind. The most important of these is getting everything set up so that they get paid correctly and on time. You’ll also need contracts for both the employer and the employee, as well as a code of conduct for all staff members who work with you.

If you’re not sure whether or not your company is ready for its first employee, consult with an accountant or financial advisor who can help guide you through the process of hiring employees, managing all their associated responsibilities and ensuring that your operations remain cost-effective.

How to Use Profitability Ratios to Grow Your Small Business

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If you’re looking to grow your small business, you need to understand profitability ratios. These ratios help you measure how efficiently your business is using its assets and generating revenue. There are three main types of profitability ratios: operating, asset use, and contribution. In this blog post, we’ll discuss what each one is and how to use them to make smart decisions for your business.

What is a Profitability Ratio?

A profitability ratio measures how efficiently your business is using its assets and generating revenue. Profitability ratios are used by lenders, investors, and profit-seeking businesses to evaluate a company’s ability to generate profit relative to sales, assets, or equity.

Profitability ratios can be calculated on an annual basis or over any period you choose. For example, if you’re evaluating your company’s profitability ratio based on the sales of widgets in a specific month, you could calculate each ratio using that period.

Operating Profitability Ratio

The operating profitability ratio measures how much profit your business generates from its operations compared to the revenue it earns. To understand this better, let’s look at an example.

Let’s say you own a company called Widget Co., which manufactures widgets and sells them to retailers for $100 each. In one month, your business produced 100,000 widgets and sold 70,000 of them at $100 each. The operating profitability ratio would be calculated as follows:

First, we calculate the gross profit by subtracting the cost of goods sold from the revenue. This gives us $700,000 (70,000 x $100 – 100,000 x $60).

Next, we divide the gross profit by the revenue to get the operating profitability ratio. This gives us 0.70 (700,000 / 1000000).

This tells us that for every dollar in revenue Widget Co. generates, it earns 70 cents in gross profit.

Asset Use Profitability Ratio

The asset use profitability ratio measures how much profit your business makes from the use of its assets, minus the cost of those assets. This ratio is helpful for businesses that have a lot of fixed assets, such as property and equipment.

Let’s use the same example as above to calculate asset use profitability ratio. In this scenario, Widget Co.’s fixed assets are worth $200,000 and its total revenue is $100,000 (70,000 units sold at $100 each). We’ll also assume that the company has no debt or other liabilities.

First, we calculate the net profit by subtracting all expenses from revenue. This gives us $300,000 (100,000 x 100 – 70,000 x 60).

Next, we divide the net profit by fixed assets to get the asset use profitability ratio. This gives us 0.15 ($300,000 / 2000000).

This tells us that for every dollar in fixed assets Widget Co. owns, it earns 15 cents in net profit.

Contribution Profitability Ratio

The contribution profitability ratio measures how much money your business makes from each sale after deducting variable expenses such as material costs and labour. It’s also known as the gross margin percentage because it is calculated by dividing the gross margin by sales.

Let’s use the same example as above, but this time we’ll assume that Widget Co. has a contribution margin of $40 per widget (meaning it costs the company $60 to produce each widget, but it sells them for $100).

First, we calculate the gross margin by subtracting the cost of goods sold from the revenue. This gives us $600,000 (100,000 x $100 – 100,000 x $60).

Next, we divide the gross margin by sales to get the contribution profitability ratio. This gives us 0.60 (600,000 / 1000000).

This tells us that for every dollar in sales Widget Co. generates, it earns 60 cents in gross profit.

This figure can help you to understand how effective your marketing efforts are and whether you’re pricing your products correctly.

How to Use Profitability Ratios

Profitability ratios are helpful when used alongside other financial metrics because they can help you make sense of your business’s overall profitability and identify areas where you can improve performance. For example, if your company’s asset use profitability ratio is low, you might consider investing in more fixed assets to increase profits.

Likewise, if your contribution profitability ratio is high, you might be able to reduce the cost of goods sold by finding a cheaper supplier or streamlining production.

Final Thoughts

Keeping track of your company’s profitability ratios can help you make informed decisions about how to improve profitability, reduce expenses and grow your business. A more profitable company is better positioned to earn more revenue, hire new employees, and reinvest.

4 Bad Financial Habits That Are Hurting Your Business

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Habits are everything.  From getting up early, to working out and eating healthy, habits are what differentiate successful people from others. The same applies in business – entrepreneurs who have good financial habits tend to make better decisions than those who lack them.

If you have poor financial habits, then your small business could be suffering as a result. What’s more is that many business owners aren’t even aware of the behaviours that are costing them money and  slowing their growth.

Let’s take a look at four bad financial habits that could be hurting your business:

#1 – Not Paying Attention to Expenses

One of the biggest killers of small businesses is neglecting to keep track of expenses. This often leads business owners to overspend on unnecessary items, or worse: not having enough money to cover necessary costs. The key to overcoming this habit is creating a budget, and sticking to it.

This will help you identify areas where you’re overspending, so that you can make the appropriate changes. For example, if your business spends too much on travel expenses, then consider having meetings via Skype or Google Hangouts instead of in-person whenever possible.

Working with an accountant is a great way to keep you accountable when it comes to  your finances. This person can help you create a budget, and  assist you with making financial decisions on behalf of your business.

Having someone who assures that things are done correctly is a lifesaver for many small businesses, especially those with little experience in managing their own finances.

#2 – Paying Too Much for Office Space

Another common mistake that business owners make is spending too much on office space. This can be a major issue, especially if your business isn’t generating a lot of revenue yet.

There are several ways to avoid overspending on office space. For starters, consider working from home until your business is more established. You could also look into renting  office space on a shared basis, or taking out a flexible contract with a coworking space. This means you won’t have to worry about forking out for furniture and equipment, and you’ll have the flexibility to pay for less space when things are slow.

#3 – A DIY Attitude

Doing everything yourself saves money, right?

Wrong.

Many small business owners try to do things on their own,  but this can be a huge waste of time and money. In some cases, you may end up doing more damage than good. This is especially true when it comes to financial matters – unless you’re an accountant or bookkeeper, there’s no reason for you to handle all  the financial tasks for your business.

Hiring professionals to help you with bookkeeping, accounting and other financial matters can save you a lot of time and money in the long run. Not only will you have more time to focus on what you’re truly good at, but you’ll also have peace of mind knowing that everything is being handled correctly.

#4 – Lax Invoicing and Billing Practices

Another bad financial habit that can hurt your business is lax invoicing and billing practices. This happens when you don’t send out invoices in a timely manner, or when you don’t follow up on unpaid bills.

Both of these things can lead to money being left on the table, which is obviously not ideal  for any small business.

To make sure that you don’t fall victim to this bad habit, it’s a good idea to create an invoicing and billing schedule. This ensures that your bills are sent out on time each month, without fail. It also helps you avoid forgetting about overdue bills, so that you can follow up with clients in a timely manner.

You may want to consider hiring an accountant or bookkeeper to help you with this task, as it’s something that can easily be overlooked by busy business owners. A simple mistake like forgetting to send out invoices on time could cost your business thousands of dollars each year – money that could have been spent on paying bills, marketing your business, or hiring new staff.

Final Thoughts

Make sure to avoid these bad financial habits if you want your business to succeed! Implementing a budget, working with professionals, and sending out invoices on time are all great ways to keep your finances in check. Remember that over time, good habits compound to  provide great results!

4 Healthy Financial Habits to Conserve Cash in Your Small Business

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In order to keep your small business running smoothly, it is important to develop healthy financial habits. This means being conscious of how you spend your money and conserving cash wherever possible. In this blog post, we will discuss four healthy financial habits that can help you conserve cash in your small business. Let’s dive into how you can build habits and create a more sustainable small business.

#1 – Set Financial Goals

In order to conserve cash in your small business, you need to get into the habit of regularly setting and updating financial goals. You can do this by thinking about your current financial situation and what changes you would like to make. Consider the following questions before setting a goal:

  • What is my current profit margin
  • What is my desired profit margin after tax?
  • What are my current expenses?
  • How many hours per week do I spend on this business?
  • What would be the best ways for me to save money or increase revenue?

Once you have answered these questions, it will be easier for you to set realistic goals that conserve cash.

Remember, your goals should be SMART:

S – Specific, M – Measurable, A – Attainable, R – Relevant and T- Timely.

An example of a SMART goal would be: Increase my profit margin from 20% to 30% within 12 months by streamlining operations and reducing costs. 

The goal is:

  • Specific because it includes how much you want your profit margin to increase.
  • Measurable because you can track your progress over time. 
  • Attainable because it’s not impossible to achieve. 
  • Relevant because it will help improve your bottom line 
  • Timely because you have set a deadline for yourself.

When setting financial goals, make sure to keep the SMART acronym in mind.

#2 – Perform an Expense Audit (and Then Plug the Leaks)

In order to conserve cash, it is a good idea to perform an audit of where you spend your money. You can do this by reviewing your bank statements from the past few months and identifying expenses that are not necessary for running your business.

The next step is to cancel any subscriptions or memberships that you no longer need or use. After that, you can try to renegotiate contracts with suppliers or vendors and ask them for a lower rate on their services. You should also make sure that your accounting software is up-to-date so you know where every dollar goes in your business (and what it’s paying for).

Finally, keep track of how much money comes  in and out of your business on a monthly basis. This will help you to stay on top of your finances and identify any areas where you need to tighten the belt.

#3 – Automate Your Emergency Fund

One way to conserve cash in your small business is by automating your emergency fund. This means setting up a system where a certain amount of money is automatically transferred from your checking account to your savings account on a regular basis.

This can help you avoid the temptation to spend all of your money and will ensure that you have some funds saved up in case of an emergency.

There are a number of different online banking services that offer this feature, so be sure to do your research and find the best one for you.

When automating your emergency fund, make sure to set up a transfer that is realistic for your budget. You don’t want to put too much stress on yourself or your business by setting the transfer too high.

#4 – Monitor Your Cash Flow DAILY

Monitoring your cash flow on a daily basis is an important habit that can help conserve cash in your small business.

The best way to do this is by setting up an automated system where you receive notifications every day at a certain time of the day when there are new transactions recorded in your accounting software. This will keep track of all expenses and income so that you can quickly see where money is coming from and going to.

Final Thoughts 

Conserving cash is important for any small business owner. The small changes outlined above amount to a big difference to your finances over time, so don’t wait to implement them in your business. Remember the old adage: in three months’ time, you’ll be glad you started today.

What’s the Difference Between Budgeting and Forecasting?

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Budgeting and forecasting are related, but they play different roles in business. In a nutshell, a budget is a step-by-step spending plan, while a forecast is an estimation of an outcome. Both have an important role to play in taking control of your business and preparing for the future, so let’s dive deeper into the key differences between the two tools.

What is Budgeting?

Budgeting is a detailed spending plan for the future. It’s used to provide financial direction while making sure you can meet your business goals and objectives. In other words, it controls what happens in your day-to-day operations by influencing how much money goes into different areas of the business, such as marketing and human resources.

Different Types of Budgets

There are two types of budgets: operational and capital. An operational budget is used to control your day-to-day operations, while a capital budget focuses on major purchases or investments in the business. For example, an annual marketing campaign will probably fall into the capital category because it’s something you do once per year instead of on a daily or weekly basis.

Budgeting Techniques

Budgeting techniques are used to determine how much you’ll spend in different areas of the business, such as sales and marketing. There are many types of budgeting techniques, including:

  • Zero-based budgeting, where all expenses for a period must be justified.
  • Percentage of sales budgeting, where a certain percentage of your total revenue is set aside for spending.
  • Value proposition budgeting, where you allocate resources based on the value each budget item brings to your business.
  • Surplus budgeting, where the total revenue is greater than the total expenses.
  • Gap budgeting, which identifies gaps between goals and actual performance levels in different areas of your business.

How to Prepare a Budget

In order to prepare a basic budget for your business, you need to calculate your total revenue for the period you’re looking at. 

Then, calculate your fixed and variable expenses. You should also factor in any planned purchases or investments over a set timeframe, as well as expected changes to your overall business strategy. 

Subtract your expenses from your income and then create a tax estimate. The final figure will be the profit that you have to invest in your business.

What is Forecasting?

Forecasting helps you create a plan for the future. It’s used to predict if your business will meet its financial goals, and is most commonly employed by growth companies that want to provide investors with an idea of their expected revenue. Forecasts are often related to quantitative data like sales forecasts or cost projections, but they can be based on qualitative data as well. 

The key difference between budgets and forecasts is that budgets are effective in the short-term, while forecasting works best over a longer period.

Qualitative vs Quantitative Forecasting

There are two main types of forecasting: qualitative and quantitative. A qualitative forecast is based on expert opinion, while a quantitative forecast uses hard data to produce numerical forecasts like sales projections.

How to Prepare a Forecast

In order to prepare a forecast for your business, you’ll need to list all of the assumptions that underpin it. This includes things like expected sales growth and any major changes in the market or economy over a certain timeframe. You should also factor in variables such as pricing models, competitor activity and customer behavior into your quantitative forecasts.

The Key Difference 

In conclusion, budgeting helps you control your daily operations, while forecasting is a tool for predicting future performance. A budget is used to set limits on your spending, while a forecast  is used to predict whether or not your business will meet its goals. Both are important tools for business performance and growth, and thus should be taken seriously.

How to Set Up and Maintain a Budget for Your Startup 

Posted on | by Jessica Weston | Leave a Comment on How to Set Up and Maintain a Budget for Your Startup 

Creating and following a realistic budget for your startup is essential. In fact, it can even determine whether or not your business makes it out of the gates. A budget shows you how much money you’ll need to make in order to break even and highlights what you can and can’t afford. It also helps you to forecast and manage your cash flow, which is essential to keep your business in good financial health. Budgeting can be a daunting task but this guide is here to make it easy by breaking it down into four simple steps. 

1. Calculate Your Costs

It takes money to make money, and it’s important to work out how much you’ll need to launch your business. Think about what you’ll need in order to start serving customers, whether that means setting up a website or opening the doors to a brick-and-mortar establishment. You can generally group your costs into three main categories: 

  • Facilities: this could be the location of your shop, restaurant, co-working space or offices. If you haven’t found the right place yet, it’s worth doing some market research to give you an estimate of how much the rent or mortgage will set you back. However, the costs don’t always end there. You might need to remodel your chosen location to fit the needs of your business. 
  • Capital Expenditure: this is how much money you’ll need to maintain and improve your facilities. Office furniture, equipment and decorations all fall under this category. 
  • Materials and Supplies: these are the items you’ll need to use in order to run your business, such as ingredients for a restaurant or beauty products for a salon. 

Remember to stay mindful of smaller costs; it may be tempting to overlook them, but they can add up very quickly.

2. Work Out Monthly Expenses 

Your monthly expenses are the costs associated with the items and services needed to run your business. You’ll need to have an idea of how much you’ll be spending each month in order to calculate the amount you’ll need to earn to break even. These expenses fall into four different categories:

  • Fixed expenses stay the same each month. Examples of fixed expenses include rent, internet packages, subscriptions and insurance.
  • Variables are more difficult to predict as they change in line with your volume of sales. Supplies, shipping costs and raw materials are all variable expenses. 
  • Semi-variables are fixed costs which can become variable if production volume dramatically increases or decreases. A surge in demand might require you to pay your staff overtime or result in a higher electricity bill than usual. 
  • One-time expenses are often unforeseen costs such as equipment repairs, but also might account for planned events such as business conferences. 

3. Estimate Your Monthly Revenue 

It’s difficult to know how much you’ll actually earn during your first few months in business. What’s more is that your monthly revenue is likely to fluctuate, so do your research and take a look at how similar business models fare throughout the year. If you’ve hired an accountant or financial consultant, they might be able to offer some valuable insight. Factors such as retainer contracts and industry-wide seasonal trends will also help you to predict what your income. However, it’s advisable to remain conservative with your estimates to prevent overspending. 

4. Review Cash Flow 

Cash is king in business and maintaining a healthy cash flow is essential for survival. Bear in mind that you won’t always be able to collect money for your goods and services straight away, which can lead to cash flow issues even if profits are sky-high. A booming sales month is great, but you may have bills that are due before you’re able to collect payment. If you don’t have money set aside for this instance, you’ll find yourself in hot water. In this sense, cash flow is just as important as profit for the financial health of your business. 

It’s wise to set aside some business savings for times when the cash flow slows to more of a trickle. Review your cash flow each month to spot patterns, prevent overspending and budget for the future. 

The Golden Rule 

Finally, it’s important to follow the golden rule as you work through the above steps: stay conservative. Highball your expenses estimate and be prepared for low sales. This helps to protect your profits and keeps you on your toes to prevent overspending. Careful budgeting allows you to make prudent financial decisions and keeps your startup on track for financial success.