Building a Bulletproof Budget for Your Business

Building a Bulletproof Budget for Your Business

Getting your expenses in line with your goals


‘A budget is telling your money where to go instead of wondering where it went.’ - Dave Ramsey, Entrepreneurship Expert


Let’s face it, you didn’t go into business just to manage the books. Although you may be a jack of all trades and an alchemist in bringing ideas to life, when it comes to bookkeeping, and more specifically budgeting, your skill set may be lacking. That’s OK. The good news is we’ve got the tools and tips you need to easily create a budget and reign in your expenses. A business should be built on a set of numbers that indicate a consistent and predictable business model. This is your first step in getting serious and building a  successful and sustainable company.


What is a budget and budgeting?


A budget is a tool used for both planning and control.  When you start a small business, your budget serves as a control device to help you manage  your plans for operations, growth, and sustainability. Budgeting is a process whereby future income and expenditures are decided in order to streamline the expenditure process. Budgeting tracks expenditures and income and helps you identify your short- and long-term financial activities. Other important steps  in the budgeting process include forecasting, monitoring, controlling, and evaluating your financial goals.


Why do you need a budget?


Every entrepreneur who is serious about his or her business needs a proper budget for the following reasons:


●        Helps you accurately monitor sales                and expenses.

●         Helps you make decisions regarding            operations, expansion, and income               generation.

●        Helps control expenses.

●        Helps you raise capital.
●        Ensures expenditures are in line with            business goals.

●        Enables you to forecast your revenue            and predict the future.

●        Helps you communicate priorities.

●        Help you identify and minimize                     dangers/risk.


Components of a budget.


A budget should include your revenues, costs, and any profits or cash flow so that you can determine what you have remaining for capital improvements or capital expenses. Most annual budgets are divided into 12 months, with blank columns next to your estimates to fill in with your actual results as the year progresses. You can consult with an accountant when preparing your budget, but it is also something you can do yourself with small business financial software like QuickBooks Online and this free budget worksheet kit here.


Every business owner tends to have a slightly different process and approach to budgeting. However, there are some common parameters found in nearly every budget that you can easily employ. Here are three cost categories and the basic budgeting calculation you need to understand before getting started:


Cost Categories Basic Budget Equations
1.       Fixed costs - expenditures that remain the same, independent of whether your sales rise or fall - e.g. rent, insurance, etc.

2.       Variable costs - expenditures that correlate with sales volumes - e.g. raw materials, inventory and shipping, etc.

3.       Semi-variable costs - fixed costs that can be variable when influenced by volume - e.g. salaries, communications, etc.
A budget should operate according to these basic mathematical equations:sales = total cost + profitORsales - total cost = profit


How to draft a budget.


Drafting a budget is easier when you have data from previous years. Past performance helps form the basis of estimates for future years. If you are reading this article, however, the odds are that you’ve never written a business budget before.


As a first step, you should develop a target for your sales revenue by estimating the realistic profit you’d like to see in the coming year. This information will drive the rest of your estimates for costs, expenses, and capital expenditure. Then, calculate your operating expenses, including wages, rent, postage, research, travel, utilities, taxes, etc.  If your business is new, or if you haven’t begun operations yet, list all of the costs you expect to incur. From here, determine your gross profit margins - that is the estimate of the cost of your goods sold (e.g., beginning inventory, shipping, raw materials) and subtract that from your overall sales revenue.


Learn the lingo.


There are six main components to developing a more detailed overall budget. Each are defined below.


1. Sales Budget This budget outlines the forecasted income streams of the business. It is usually the first budget you prepare because the revenue generated will ultimately determine the expenditure. Under this budget, sales are forecasted in terms of volume based on: previous patterns, economic and political conditions, state of competition in the market, and other external infractors.
2. Production Budget The production budget determines the number of units of a product that will be produced within a certain period.
3. Direct Material Purchases Budget This budget covers any materials purchased for the production of the goods.
4. Labour, Overhead and SG&A Budget This budget is related to labour, overhead, and SG&A (selling, general and administrative) Labour that participates in the production process forms the direct labour cost. This budget is prepared according to the number of labour hours and the cost per hour. Overheads are those costs that are not incurred directly in the production of goods, but are indispensable with regard to the production activity e.g. rent of the factory. The budget of the overhead cost is prepared in relation to the direct labour hours. SG&A costs are incurred in order to conduct the day-to-day operations of a business. They consist of fixed and variable costs.
5. Cash Budget Cash in business is king. No matter how successful a business is, if it runs out of cash, its survival is seriously jeopardized. The cash budget helps to formulate in advance the payment and receipt cycles of the business and thus it ensures that cash is readily available to a business. By formulating a cash budget, the business can keep track of its accounts receivable and accounts payable. In order to avoid shortage of cash, the business can arrange its credit plans related to accounts receivable and accounts payable accordingly.
6. Budgeted Financial Statements Budgeted financial statements are prepared on the basis of each budget component. Through the budgeted financial statements, a business will be able to forecast its profits. Profit forecasting is important because it will determine the viability of the business.


Preparing a budget is just the beginning. You then need to compare the actual amount you spend to your budget every month. You shouldn’t be alarmed if there are significant discrepancies in your first year of budgeting. The goal is not perfection, it is to aid you in better planning for the future. You will be grateful you developed the discipline of budgeting when you apply to extend your line of credit, pitch to an investor, sell the business, or decide whether or not you are ready to make a significant investment in capital.


Getting a handle on expenses.


When you begin tracking your budget, you will likely be surprised by your expenses. If you let your expenses run away with all of your revenue, there will be nothing left to invest back into the business or to pay yourself.


It is important to manage your expenses carefully so that you can see where your revenues are going and take advantage of every possible tax incentive. Most online accounting software provide you with tools to track your expenses. Or, you can download a free expense tracking template here. Apps like Expensify can help ensure no receipt gets lost and that you stay on top of every transaction. Using available tools will give you a bird’s eye view of where your expenses are going.


So, who should manage your expenses? There is no one answer. You can hire a bookkeeper, commission an accountant, or you can do it yourself. Whatever method you choose, you should ensure whoever is managing your expenses is trustworthy, that there are checks and balances in place, and that they are properly licensed and certified. At tax time and periodically throughout the year, you should always bring in a reputable, experienced accountant.


Through effective expense management, your business will be leaner and stronger and you will have a healthier bottom line in the end.


Top five budgeting and expense management tips.


Below are our top five tips for effective budgeting and expense management:


  1. Do not invest money in new requirements or other assets if you have not created a budget.

  2. The best way to understand your spending pattern is to look back at your past purchasing record.

  3. Always look to cut unnecessary costs, e.g., look for new suppliers, look at cheaper options to save money, etc.

  4. Make a plan to review your budget and reference it often to ensure you are sticking to your budget strategy.

  5. Keep business and personal finances separate.


If you pay close attention to how your business is spending its money, you can always find ways to be more profitable. You will also get much more enjoyment out of running your business, as you will have the peace of mind of knowing you are building a company that is healthy and wealthy.

By Samantha Ferguson

September 24, 2015