Many small businesses have one overall operating budget that sets out how much money is needed to run the business over the coming period (for example, a year).
As your business grows, your total operating budget is likely to be made up of several individual budgets. For example, if your business grows to have multiple departments, each department might prepare a budget.
Any budget you create will have 4 parts:
Your business will normally have 3 kinds of costs:
- fixed, for example rent, salaries
- variable, for example raw materials, overtime
- one-off capital costs, for example equipment purchases
To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.
2. Revenues forecasts (sales forecasts)
To help you forecast what cash you expect to receive (revenues) you should look at your records for the previous year.
To realistically predict your sales, you'll also need to consider any changes you expect to occur in the coming year. And how they could affect your sales. This includes things like:
- changes to your marketing (increasing or improving it)
- recruiting more staff
- selling a new product
3. Profit forecasts
Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will help you to analyse your margins and other key ratios such as your return on investment.
4. Projected cashflow
Your cash budget projects your future cash position on a month-by-month basis. To create this, you'll need to look at what cash you expect to receive (revenues) and what you think you'll pay out (costs). You should review this every month.
Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It will also give you the opportunity to respond to any problems, for example by arranging an overdraft or taking out a loan.
If you're just starting a business, your budget will be your best estimates.
Try to base these estimates on research. For example, research how much utilities will cost or what your customers spend money on.
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