Skip To The Main Content

How to budget for a small business properly

By Sam Boothroyd, founder of The Small Business Coach

Budgets are often viewed as something “big businesses” should be doing and may not be a priority  for smaller set-ups. But having a budget can benefit businesses of every size , from established businesses to firms just getting started.

It can also be one of the main reasons businesses fail. We’ve all heard the saying “If you fail to plan, then you plan to fail” and this couldn’t be truer for businesses. A budget is a vital part of any business plan, and every business, large  or small, should have one of these. 

Without a budget, a business is in the dark over its finances and will potentially  miss opportunities to invest in the future. In fact, budgets are less about controlling spending and more about planning for future growth.

Once you have a budget it’s time to put it to work, and the best way to do that is to compare your actual numbers to your budgeted numbers each month. 

What to look out for

There are a few things to look out for when comparing your budget to actual figures. 

1. Overspends: This is probably the most obvious area to review. The main aspect to consider here is to understand why you have overspent. But not all are bad. If you’ve overspent on materials because you have sold more, then great! 

2. Underspends: This is the area businesses ignore the most, although they shouldn’t. Underspends are not always a good thing. If you have underspent in an area you should understand why. Have you negotiated cheaper rates with suppliers? Are you selling less?

3. Tracking your profit margins: There are two main profit margins to look out for: gross margin and net margin. Tracking these percentages are key for you to understand your business. Sometimes a reduction in sales is OK when your gross profit increases.

For instance, say you usually turn over £100,000 per month with a gross profit percentage of 75 per cent, that would give you a gross profit £75,000. A reduction in sales of  5 per cent would mean you have £95,000, which in the face of it looks negative. But if you have managed to achieve a gross profit percentage of 80 per cent that would give you a gross profit of £76,000.  

4. False benefits: This is where you can use percentage changes in your variance analysis. Let’s say you have increased sales by 10 per cent. Sounds great, but what if material costs have increased by 12 per cent? If that’s the case then there will be a reduction in gross profit.

5. Manage your cash: Just because you show a profit within your budget it doesn’t always mean you will have enough cash. Budgeted figures do not take into consideration when money is coming in or going out the door. 

Month one might look like this:
Sales - costs = profit
£100k - £60k = £40k
But those sales might be on 30-day payment terms and your costs might be on pro-forma or 14-day terms, meaning you would need to be able to fund the costs before the money from the sales hits the bank. 

Once the budget is finished it is advisable to look at each area of income and expenditure and create a cash forecast. 

What about the future?

Planning for the future is a huge part of most businesses, particularly for small firms which are typically looking for quick growth. 

Understanding how growth will affect your finances will mean you are prepared well in advance and can react according when revenue does start to grow. You will know when to increase staff, increase advertising or even move premises, safe in the knowledge you have complete understanding on how it will affect your profits. 

It will even put you in a great position should you wish to obtain finance. Showing a lender you understand your business finances in detail will only increase their confidence in you.