Why create a business budget at the start of the financial year? | Mission Grow
Much like how New Year's Day marks the perfect time for self improvement, the start of a new financial year presents an opportunity for businesses to organise their finances.
Sticking to a budget is pivotal when it comes to meeting financial goals. So, we’ve created a budget building guide that’ll set your business up for success in the next financial year.
Why should you create a business budget?
According to the Australian government, creating a business budget will help you:
Track your business’s finances
Determine your business’s financial performance
Efficiently allocate funds within your business
Set goals effectively
Make sound business decisions
Make more money
If you’re a business owner, setting a business budget will help you spend and save more efficiently, which will ultimately aid the growth of your business.
How do you create a business budget?
Step 1: Start off by calculating your costs
The first step to building a business budget is evaluating and calculating all of your costs. Because businesses generally have a lot of different costs, it’s easier to categorise these into fixed and variable costs.
Fixed costs are costs that are the same each month, such as:
Your salary
Rent
Insurance
System costs
These costs are easier to calculate, as they’re usually pretty constant.
Variable costs, on the other hand, are costs that vary each month, such as:
Employee wages
Materials
Supplies
Product costs
Unlike fixed costs, variable costs are harder to calculate. If you’re struggling to come up with a number, it’s recommended that you“estimate the maximum amount you expect to spend over the budget period.”
According to the Australian Government, you should aim to transform some of your variable costs into fixed costs, as this will help you plan your finances more effectively.
When planning your variable costs, you should also put money aside for emergencies or unexpected occurrences, so if something were to come up, you’d be able to manage it effectively.
After calculating your fixed and variable costs, it's also a good idea to estimate the costs of some of the things you’d love to purchase for your business in an ideal scenario, even if you can’t currently afford them. Not only will this inspire you, but it will help you allocate your spending if you happen to have a successful year.
Step 2: Determine your income
Once you’ve noted down all of your costs, you need to estimate your revenue.
According to the Australian Government, you should be conservative when predicting your income. If you’re stuck between numbers, it’s better to go lower, rather than higher, as this will help you plan more carefully.
If you’re a business that’s been operating for a while, you can approximate your income by looking back on your data, as well as market trends.
For newer businesses, you’ll need to be more reliant on industry data. It’s also a good idea to enlist professional help, as this will provide you with sufficient direction.
Step 3: Start planning
After calculating your costs and income, it’s time to create a budget. Your budget will help you determine where to allocate your funds during the next financial year, so it’s important to put a lot of time into this step.
You’ll need to plan your spending for each month of the new financial year, using past data as your guide.
Determine your monthly expenditure based on estimates of your income and expenses. Different businesses peak during different seasons, so plan your spending according to the relevant trends for your business.
Once you’ve come up with a budget plan, note it down in a document.
Step 4: Use your budget
Now that you have your budget, it’s time to use it.
Your budget will guide your spending and keep you on track. If you’re spending too much, cut costs to avoid wasting more money. If you’re making more than expected, find ways to optimise your performance.
It’s important that you stick to your budget throughout the financial year, as this will help you achieve your business’s goals.
Step 5: Monitor your budget
It’s important to routinely monitor your budget throughout the year. You may find that:
You’re performing better or worse than expected
You’re allocating too much money each month
You’re not allocating enough money each month
If your budget isn’t reflective of your current business situation, make any necessary changes. Your budget should be keeping you on track, so if you find that it’s not working for you, be realistic and update it.
Budgeting is an easy and efficient way to keep your business on track this financial year.
Without a budget, you may find yourself spending too much, not meeting targets or making losses. Efficient planning will help you adapt to changes in the marketplace, spend in ways that’ll benefit your business and best of all, make more money.
Creating a budget will enhance the efficiency of your business, so if you want to grow next financial year, now is the perfect time to begin planning.
Are you ready to maximise your business?