Budgeting for success: the importance of good financial management
Running and overseeing a small business means you have a limited amount of money available. Therefore, it's crucial to handle your finances effectively and establish clear budgets and spending limits for each aspect of your business operations.
Let’s take a look at why budgeting is such a vital part of your financial management, and what you can do to keep your company on budget and in a positive cashf low position.
4 ways to stay in control of your business budgeting
Running a successful business requires maintaining strict control over your expenses.
Sales may be bringing in healthy revenues, but the income and profits you’re generating can quickly be eaten up if you’re overspending on operational costs, marketing campaigns, staff payroll or investments in new hardware and software.
We’ve highlighted four ways to put good, solid budgeting at the heart of your financial process:
1. Embrace the power of budgeting
A well-designed business budget provides the groundwork for becoming a financially stable and successful company that effectively manages its expenditures.
You don’t have to use a complicated budgeting app; a simple breakdown of income and expenses in an Excel spreadsheet can be a great starting point.
To get started:
Track your projected sales, so you understand your future revenue numbers and have a solid projection for your income over the course of the year, or budget period.
Calculate your costs, including fixed costs like rent and utilities, and variable costs like inventory and marketing. This gives you an understanding of your total expenditure. Don't forget to factor in business taxes and contingency funds to cover emergencies.
Set clear budgets for the coming period’s spending, based on the projected total income and the estimated fixed and variable expenses. Always allow for some flexibility to accommodate inflation and fluctuating costs.
Regularly review your budget, so the document is always evolving. Reviewing and updating your budget helps you stay on track, identify areas for cost-cutting, and make informed decisions about resource allocation. Remember, a budget is a living document, so adapt it as your business evolves.
2. Track your budgets, income and spending
Establishing the budget is just the beginning. It's crucial to monitor all income and expenses and adjust your budget according to the current state of your business finances.
Using the latest cloud accounting software can work wonders. These cloud tools help you record your incoming and outgoing transactions in real time, so you can work with the most up-to-date numbers and financial data when reviewing and reworking your budget.
To improve your tracking:
Use codes to categorise your expenses – the Chart of Accounts in your accounting software simplifies the process of categorising each expense as it occurs. This makes it straightforward to review your financial reports and analyse your spending patterns.
Review your spending – check your spending against each code and see where budgets are on track, or where there’s overspending that’s threatening your budget. Are there subscriptions you can cancel? Or could you renegotiate rates with your suppliers?
Plan for seasonal trends and patterns – tracking your income and expenditure helps you to spot, predict and plan for the financial ups and downs you’ll experience over the year. The more you understand your cashflow, the better equipped you are to stay on budget, make solid strategic financial decisions and avoid unexpected shortfalls.
3. Separate your personal and business finances
It’s tempting to think of the money in the business as ‘your money’. But it’s crucial to have a clear divide between the company’s money and your own money, as an owner and director.
Here’s why that separation is important:
Open a dedicated business bank account – all the cash you generate, supplier bills you pay and transactions you carry out will be logged through this account. This keeps your own cash and your business cash entirely separate.
Track your business expenses – by maintaining distinct bank accounts for business and personal use, you can effortlessly monitor your business expenses and manage your budgets. This approach eliminates any confusion with personal expenses that might otherwise complicate matters.
Consider getting a business debit card – a business card helps you to pay for business-related costs directly from your business bank account. This helps you to track your expenses and keep a closer eye on your budget.
4. Forecast for the future: don't just track the past
Using historical data as the basis for your budget and financial strategy is an excellent foundation. Additionally, you can use this data to project into the future and develop valuable forecasts.
For example, you can:
Get clear cashflow forecasts – based on your historical sales trends and projected expenses, you can quickly estimate your future cashflow. Having this view of your future cash position is extremely helpful when setting out your budget for the period.
Plan out your budgets and cash management – with forecasts at your fingertips, you can plan for seasonal fluctuations, identify potential funding needs and make informed decisions about the short, medium and long-term strategy of the business.
Be ahead of the curve – with solid budgets, forecasts and a great overview of your finances, you can be more in control as a business owner. Whatever the market throws at you, you’re better prepared, agile and ready to respond.
Talk to us about getting on top of your budgeting
Managing finances can be daunting, particularly if you're inexperienced in business operations. However, it's important not to hesitate in reaching out to a qualified accounting expert for assistance.
As your adviser, we can:
Streamline your record-keeping, bookkeeping and financial reporting.
Give guidance on budgeting, forecasting and financial management.
Help you maintain healthy cash flow and keep your budgets on track.
Let’s sit down and talk about getting your budgets and financial management in order.
Get in touch now to talk about budgeting.
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