Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, and should not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.
Most businesses start preparing a budget around two to three months before the start of a new financial year.
Begin by asking these questions:
- What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
- What are the direct costs of sales - ie costs of materials, components or subcontractors to make the product or supply the service?
- What are the fixed costs or overheads?
You should break down the fixed costs and overheads by type, eg:
- cost of premises, including rent or mortgage, business rates and service charges
- staff costs eg pay, benefits, National Insurance
- utilities eg heating, lighting, telephone or internet connection
- printing, postage and stationery
- vehicle expenses
- equipment costs
- advertising and promotion
- travel and subsistence expenses
- legal and professional costs, including insurance
Your business may have different types of expenses, and you may need to divide the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.
HM Revenue & Customs (HMRC) provides tax budgeting advice for the self-employed.
The budget should be in place before the start of the financial year. Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See write a business plan: step-by-step.
Once you have figures for income and expenditure, you can work out how much money you're making. You can look at your costs and work out ways to reduce them. You should also be able to spot if you are likely to have cashflow problems - giving you time to do something about them.
You should stick to your budget as far as possible, but review and revise it as needed.