Setting a financial budget

We are now approaching the end of 2020 which means for a lot of businesses their year end is approaching too.

This is a great time to sit down and have a look at your finances and set a budget for the new year.

What is a budget?

A budget is a financial plan to estimate future income and expenses. Its usually set over a defined period of time - a month, a quarter, a year, 3 years etc.

For businesses, budgets are usually prepared for the next 12 months and aligns with your year end.

Why should I prepare a budget?

Preparing a budget gives you the opportunity to sit down and evaluate your income and expenses over the last year. You can scrutinise everything you have spent and you will be able to see what has worked and what hasn't.

It also helps you look ahead at your plans and goals for the new year. Are you happy with your income and profit this year? Do you want to grow? Do you want to reduce your costs?

By thinking about your goals for the year ahead you can plan on what you need to do and spend to make that happen.

For instance, you may want to grow and increase sales by 20%. How can you achieve this? Put your prices up? Work longer hours? Offer new products/services? Take on employees?

Thinking about this in advance will give you a plan and a strategy that you can use going forward rather than just winging it!

It will also help keep you accountable and give you something to aim for!

How do I set a budget?

The easiest way to create a budget for an existing business is to look at your current income and expenses as the starting point.

For many businesses the focus for a budget are the costs of the business as this is something that you as the business owner can control.

Then look at your plans and goals for the new year and decide whether there's anything you need to change.

  • Are there any costs you are going to remove?

  • Are there any new things you need to spend money on this year? - New equipment, new staff member, try using certain paid advertising campaigns to generate additional income/new leads

For budgeting sales income, you can estimate sales based on previous years and if you are effected by seasonal trends you can predict those too.

Remember that when preparing budgets they should be SMART!

  • Specific

  • Measurable

  • Achievable

  • Realistic

  • Timely

There is no point setting a budget showing income doubling over the year with costs reducing as the likelihood of that ever happening is very slim.

I've set my budget, what now?

The next step is to review it!

This may be every month or quarter but you want to looking at your actual vs your budgeted income and expenses to see whether you are on track to meet your goals.

If you're not then it gives you the opportunity to tweak things a little more and helps provide direction.

I hope this blog has helped show how budgets can be an effective planning tool for your business.

If you have any questions or would like help preparing a budget please feel free to contact me.

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