Running a business involves catering for many aspects of the business that can bog you down.
You can even forget crucial roles, such as monitoring your small business finances. Although budgeting may not be the best and most exciting part of running an enterprise, it is fundamental for success.
When starting a new business, a budget is a vital part of your business plan. Once the business is open and operational, then budgeting becomes an essential exercise that takes place annually or quarterly.
A budget comprises of fixed and variable costs accompanied by the allocation of monies to reflect business objectives.
The Importance of a Business Budget
Many small businesses fail within the first year due to numerous reasons.
The most common ones are lousy marketing, a poorly designed strategy, bad pricing, and financial issues. Lack of or poor budgeting can also result in failure.
A budget keeps business finances under control and helps to evade debt—which can be hard to get out of.
Here are more reasons your business should have a budget.
- Offers a clear and accurate picture of an enterprise's expenditures and revenues; outlines how money will be spent and how the spending will be financed.
- Drives important business decisions, including marketing, hiring, and purchasing equipment. Also, the business budget determines whether a business should improve marketing efforts, increase efficiency, or reduce expenses.
- It helps to identify financial problems before they arise, such as cash flow difficulties.
- It is a requirement when seeking business loans from financial institutions or equity funding from investors.
- Provides a tool for performance evaluation. You can know how the business is performing based on the revenue you get and the expenditure you spend. Also, budgets provide invaluable insights into the performance of employees and can be used to reward good results.
- With a budget, you can manage money You can allocate finances where they are needed. A budget also assists with cash allocation to determine the funds that go to working capital, fixed capital, and other expenses.
- Sheds light on pricing. A budget helps you determine your expenses so that you know the true cost of making your products and services, and therefore set a reasonable and competitive price for them.
- Increases your flexibility to changing market conditions. You can make the necessary changes to take advantage of growth opportunities or cut costs during slow business periods.
- Useful in bottleneck analysis; can be used to identify what you can do to expand the bottleneck's capacity or shift work around it.
Helpful Tips for Writing a Budget
Although a budget has many benefits for businesses, many businesses struggle writing one. They spend loads of time and effort drafting a budget that meets their business needs, all in vain.
Here are several tips to help you write a best-in-class budget for your enterprise.
1. Be flexible
Writing a budget for your startup may seem daunting and strenuous. That's because you are new in the field, and are unsure of what to include or omit. It is okay to feel overwhelmed at first, but you have better days ahead.
The first year may be full of amendments, but the second year will surely be better. For example, when your expenses exceed your revenue, just make some changes in expenses.
2. Make conservative estimates
During your first budgeting year, it is best practice to make conservative estimates.
Notably, you should underestimate your revenue while overestimating your expenses. Ensure you account for both fixed and variable costs. For a new business, do not forget to include startup costs.
Concerning revenue, make sure you forecast how much you will generate monthly, quarterly, and annually. Many businesses make the mistake of overestimating revenues; do not make it. It would be unreasonable, for example, to project that you will generate revenue of £90,000 in the first year when you do not have an established customer base.
If you have been in business for some time, you can use the last year's figures as a guide in budgeting. You can also use historical information on sales and costs. For instance, if you had revenue of £20,000 the previous year, you can estimate £30,000 if you expect growth to occur.
Do not rely entirely on historical data; also use your sales plan. Importantly, be realistic when drafting your budget.
3. Decide how to spend
Your spending habits determine whether you will adhere to your budget.
If you spend money frivolously on things that do not grow your business, you are wasting money that could be spent in more productive ways. For instance, spending thousands of dollars on office furniture and decor that does not bring revenue is a waste of money.
However, when you increase your spending on marketing because it is generating quality leads, you make a great investment. You can minimise your spend by, for example, deciding whether to buy or lease equipment and office buildings, or buy on finance or outright.
4. Put aside an emergency fund
You should try to spare some portion of your revenue every month and have some saving account. Your budget may be too tight to accommodate some savings, but you should try as much as possible to do it.
These savings will be beneficial in the event of an emergency or sudden expense.
For example, if a big bill suddenly emerges, what would you do if you don't have an emergency fund or savings? You must have a plan that will guarantee your business continues to operate during rainy days.
5. Adjust for seasonality
If your business has peak seasons and off-peak seasons, your budget needs to reflect these cycles. You cannot risk spending all the money you generate during the peak season. You must devise strategies that help you retain money to cover the off-peak season.
For example, you can keep some savings during peak seasons to cater for expenses during quiet months. The bottom line is to make as much money as possible during the busy months to sustain operations during off-peak.
6. Involve the right people
Do not be afraid to ask for help when writing a budget. You can ask your accountant for estimates of figures for your budget, such as production costs and sales targets. Use your accountant's estimates and yours to craft a realistic budget.
According to Forbes, you should think outside the box and involve people in your business, such as employees who can bring fresh perspectives to the budgeting table.
For example, if you operate a business with delivery services, you can involve the drivers because they are well positioned to determine when the vehicles will require repairs or new purchases.
7. Use the right tools
If Excel is not working well for you, it is time to explore other tools.
8. Plan for budget reviews
Do not be the kind of business that drafts its budget and puts it away until it encounters some financial difficulty.
Review your budget as often as possible to monitor your progress and make adjustments where necessary.
9. Show restraint, not rigidity
What happens when something comes up, maybe a lucrative business opportunity—that was not included in your budget? Do you ignore it because it is not in your budget?
No, your budget is meant to restrain you from unnecessary spending, not limit you from exploring opportunities. Don't be afraid to "bust" your budget to leverage valuable business opportunities.
Limited Company Expenses Guide
What Should You Include in Your Budget?
The basic components in a budget include:
Your budget should include three kinds of costs:
- Fixed costs: these costs are constant and include items like rent, utilities, salaries, legal fees, website hosting fees, accounting services, and insurance.
- Variable costs: they include the costs that correlate with the sales volume such as raw materials costs, labour costs/commissions, advertising, transportation, inventory, printing services, contractor wages, and freight.
- One-off capital costs: these are one-off costs like the purchase of computers, business premises, furniture, software, and gifts.
Your budget should include your projected revenue based on your sales history and forecasted sales.
These figures should be accurate because they are the cornerstone of your budget. You can use your last years' sales to predict your projected sales. If you are a startup, some research will help you determine your revenue.
You attain this figure by subtracting your operating costs from your revenue.
Once you have the profit estimates, you can plan for adding employees, moving to a bigger premise, and buying new equipment. If your profits are negligible, you must troubleshoot your projected costs to identify areas you can reduce.
New businesses should include startup fees in their budgets.
A budget is the oldest management tool in the world and is still viable today. Many business owners and managers write budgets monthly, quarterly, or annually but unfortunately stick them in the bottom drawer and forget about them.
This article is a wake-up call on the importance of budgets for startups and small businesses. It goes a step further to offer tips for writing an incredible budget and what to include in the budget.
Limited Company Expenses Guide
- Allowable business expenses
- Employee expenses
- Travel expenses
- Office & equipment expenses
- Professional services expenses
- General expenses
- Allowable business expenses
- Employee expenses
- Travel expenses
- Office & equipment expenses
- Professional services expenses
- General expenses
Read More Guides below:
My tax code is incorrect ‚- how do I change it?
If your tax code is incorrect, you can use HMRC's check your Income Tax service to notify them. If you're not able to use the online service, you may get in touch with HMRC through other contact methods.
When Should I Hire a Small Business Accountant?
If you're a self-employed person or small business owner, you might have already asked yourself the question, "Do I really need an accountant?"
When people ask that, they usually mean, "Can I justify the cost of an accountant?"
It seems simple: Hiring an accountant might seem like something you could do without, and if you handle the accounting yourself, you save money.
But that isn't the best way to think about it. The reality is that there are hidden costs associated with DIY accounting, and you don't want to come up short. So instead, ask yourself, "Will hiring an accountant add value to my business?"
The answer is yes.
Below, we'll cover the key cases when you should hire an accountant:
Where can I find my Accounts Office Reference number?
You can locate your Accounts Office Reference number (AORN) on the confirmation letter you receive from HMRC when you first register as an employer. The AORN contains 13 characters, and follows the format 123PA12345678.
How do I plan cashflow?
Here are a few strategies to better cash flow management:
Be rigorous about updating your cash flow: It can be helpful to update your cash flow whenever there is new information-such as when you've made a payment, or when a client informs you that a payment is coming in late. You'll need to have a system for managing your cash flow, whether that's a spreadsheet or cash flow management tool.
Carry out an in-depth analysis on a regular basis: Carve out a block of time each quarter to carry out an in-depth review of your cash flow. You'll want to assess your overall financial position, and look ahead at your cash flow projection for the next quarter.
Implement milestone payments for extended projects: If you're working on an extended project, consider structuring your payments by milestones-rather than receiving a single payment at the end of the project.
How do I find an accountant?
In today's times, you can find an accountant pretty much anywhere you go whether that's walking down the high street or browsing the internet. Take a look at our guide on choosing an accountant to get some tips on what to look out for when choosing an accountant.
What are National Insurance numbers?
The National Insurance number is a number used in the administration of the National Insurance or social security system. It is unique to each individual, and helps ensure that the National Insurance contributions and tax you pay are properly recorded against your name.
Small Business Accounting Guide
- When and why you may want to register a Limited Company
- Advantages and disadvantages of a Limited company
- Limited company alternatives
- When to register for VAT
- Advantages and disadvantages of VAT
- How to take money out of your company
- Dividend tax rates
- Limited company expenses & corporation tax
- Annual accounts and deadlines
- Confirmation statements and deadlines
- Self Assessment tax returns
Contractor Accounting Services
We pride ourselves on providing an unparalleled level of support that will make you feel valued, eliminate your admin and ensure you're being as tax efficient as possible.
VAT registration & filing
We'll registered your company for VAT, and ensure VAT is always filed well ahead of the deadline. We will ask you to confirm that you're happy for us to automatically file your VAT without having to approve it which will ensure that we can get this filed as soon as possible.
We'll also help you get setup with a Direct Debit for HMRC so that you can make your VATpayments automatically without having to manually do this every quarter. This saves you time and the stress of ensuring you've paid on time, and importantly will make sure you don't have to pay a penalty for a missed deadline.
We aim to complete your annual accounts well ahead of schedule to ensure you have complete financial records.
You should never have to guess how much corporation tax is due. We'll make sure you know how much is due and when it's due.
We'll make sure to keep your Companies House account up to date and ensure your confirmation statement is filed on time.
We include a Self Assessment with our operate and grow packages and this is also available as an additional £99+VAT one-off charge.
From your salary, dividends, pension, investments and company expenses, we'll help you optimise your tax.
How do accountants charge contractors?
Like with all service offerings, you can find contractor accountants at pretty much every price point. Some accountants will charge by the hour, some by piece of work or like ourselves, will offer a fixed monthly fee covering everything you will need in one clear package.
How much should accounting cost?
As a new business owner, you'll often find yourself juggling numerous roles and tasks-from growing your business, to managing your operations, financesand taxes.
In addition, you're now required to meet your legal obligations as a limited company director-such as filing the necessary paperwork and accounts on time-or you'll risk being penalised.
Staying on top of all of these tasks can feel overwhelming, and here's where a limited company accountant comes into the picture.
Below, we'll look into:
- What you can expect to pay for limited accounting packages
- Services that are included in the cost
- FAQs relating to choosing a limited company accounting provider
Beginner's Guide to Bookkeeping for Small Business
Starting a new business?
Bookkeeping requirements are unlikely to be at the forefront of your mind. At this stage there are more pressing things for you to think about.
However, once your business is taking shape, you will need to start thinking about keeping up-to-date and accurate accounting details of your income and expenses. But what kind of records do you need to keep?
More than just a legal requirement, basic bookkeeping is an essential part of your ability to manage your business effectively.
Every year, your business accounts will need to be completed. If your business is operating as a limited company, you will need to submit your company accounts to Companies House. If you are self-employed, your business accounts will be used to calculate your Self Assessment tax liability.
Your bookkeeping records will form the basis of these statutory financial statements. They should include information relating to your sales, your expenses, salaries of you and any employees, along with other bank transactions.
It might sound complicated, but take it one step at a time and it's actually quite manageable.
If you're really struggling to stay on top of it all, there are plenty of small business accountants and professional bookkeepers who will be happy to help. So, even if you're terrified of numbers, rest assured that there's a solution out there for you.
How to make and send an invoice for your clients
You've delivered your work, and it's time to receive your payment.
Before that, you'll need to make an invoice. It's an important document: not only does it help you obtain money you're owed, it also serves as evidence of a transaction in the event that you need to seek legal action to handle non-paying clients.
If this is new to you, you might be wondering: How do I create an invoice, and what must I include? Are there best practices or tips I need to know?
We'll answer all of these questions below:
Bookkeeping vs Accounting Differences
As a small business owner, having a good grasp of your business financials is key-even if you've hired an accountant.
While you can delegate your accounting tasks, understanding the basics will place you in a better position when it comes to discussing your business finances with your team members, financial professionals or potential investors.
Previously, we've explained about the top accounting terms and concepts you need to know. In today's post, we'll explain the differences between bookkeeping and accounting. While these two terms are often used interchangeably, they refer to two vastly distinct functions and roles.
5 invoice template tools to help you invoice when self employed
An invoicing problem is a good problem to have.
It means that you have too many clients or too much work to properly charge for it. The good news is that it's an easy problem to fix.
I know how important this is because I've been there as a small business owner - and I searched for a long time to solve this problem and make it painless.
Besides hiring a personal assistant or part-time accountant (which is impractical for most smaller-time, one-person-show contractors), there's the option of using invoicing software that makes the process easy.
Below, I break down the difference between five popular invoicing tools to help you get started on making a decision.
Your decision will ultimately depend on what your business really looks like.
These are some questions you can ask yourself:
- Do you only have a handful of regular clients?
- How do your clients prefer to pay you in a certain way?
- Are late payments a recurring problem for you?
- Do you send out invoices, or does somebody else?
- Do you already have accounting software in place, or are subscribed to an accounting package that includes the use of an accounting software?
- What other applications and tools do you use for your business?
5 Common Small Business Accounting Mistakes & How to Fix Them
A broad swath of small business owners are tackling the myriad tasks required to pay bills, invoice customers, cut checks to employees and contend with past-due accounts, among other accounting tasks.
While that might work for very small businesses, it often opens the door for firms to make accounting mistakes that undermine their growth and siphon precious time and mental focus from other important areas of their business.
Here are five accounting mistakes that can derail growth for small businesses and how to avoid them.
How to find an accountant
If you have a company, or are starting one, then you will need an accountant.
Though you could do all your accounts yourself, in practice few business owners have the time.
An accountant also checks that you are doing everything correctly, and is a useful reference for both HMRC and financial institutions should you ever need to apply for a loan.
The trouble is that finding the accountant who is right for you is never easy.
You do not want to pay more than you have to, but are low-cost, self-service, internet-based accountancy packages really the best fit for your business needs?
In this article we shall break down that option and its alternatives for you, as we answer the key questions that are occupying your mind right now:
- Do I need an accountant?
- What should I look for in an accountant?
- How do I find the best accountant for me?
The purpose of this article is to give you the context and background you need to ask the right questions-especially when you may not yet know what those questions are.