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How to plan and budget for the financial year

How to plan and budget for the financial year
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How to plan and budget for the financial year
Siobhan Stirling - Sharp Minds Communications for Capital Space by Siobhan Stirling - Sharp Minds Communications for Capital Space
Owner/Director - Sharp Minds Communications Ltd

The new financial year can mean many things to SME owners. But for most, it is a time to focus on planning ahead. Many small business owners think of budgeting as their least favourite part of running a company — but if you want to be successful and solvent, creating and maintaining a business budget will be a critical component of your success. If you are stuck on where to start, try following our step-by-step guide, which will provide you with all the tips and tricks you will need to budget for the financial year.

1. Estimate monthly fixed costs

A good place to start is by dividing your expenses into fixed and variable costs. Fixed costs are pretty easy to identify, these are the consistent and recurring expenses that must be paid every month and are necessary to keep the business running. Rent for your office, insurance prices, credit card fees, and the costs of leasing the required equipment for your business are all examples of fixed expenses. Knowing your fixed costs allows you to determine the basic minimum that your company requires to stay afloat. It’s important to research these expenses and make sure you’re getting the best deal on each cost.

2. Determine variable expenses

Now that you've determined your fixed expenditures, it's time to look at your variable costs. Variable costs are those that fluctuate depending on how much you utilise a service. Some examples of this would be office supplies, owner’s salary, marketing costs and office supplies. Being aware of your variable costs allows you to reduce or increase them based on your current profit.

3. Predict one-time costs

Aside from your business's fixed and variable costs, you must also account for one-time expenditures, commonly known as 'sunk costs’ and incorporate them in your budget plan. These expenses will be less frequent and likely more relevant in the initial phase of your start-up or if your business is going through a growth period. One-time expenses could include owning rather than renting equipment or basic office furniture or domain registration for your website. There are segments within the umbrella of one-time costs, there are ways you can learn more about how to define and navigate these.

4. Set up an emergency fund

When running your own business, some expenses will sneak up on you when you least expect them. These could include unexpected equipment repairs or customers who are inconsistent with their payments or pay invoices late. All which can throw your budgeting off considerably and have drastic effects on your cash flow. Rather than being caught off guard by these unpredictable financial demands, set aside money in an emergency fund to cover any unexpected bills. This fund's primary purpose is to assist you in times of need.

5. Project revenues

By utilizing your sales activities, you can forecast future revenue. This will provide you and your team (if you have one) with goals to work towards over different timeframes and allow you to accurately compare how well you're doing with how well you planned to do. The ability to compare and contrast actual revenue with projected revenue will help you make better revenue estimates in the future. The more that you can align expected vs. projected revenue, the better you can set an intentional budget that helps you to achieve your goals and maintain that all important cash flow.

6. Track your profit (or loss)

A good indication of how well your business is performing is your net profit margin, which is the money you’re left with after deducting your operating expenses, interest and taxes. It’s important to note that  profit earned is not the same as revenue generated. Even if your revenue boasts off an impressive revenue figure, it’s possible that your business is still suffering a serious loss after deducting your costs. Being on top of tracking your profit/loss allows you to make better informed budget decisions, such as where to cut expenditures or whether to raise prices to compensate for low profit margins.

7. Review your budget regularly

It’s all well and good having a budget plan but it’s useless if you don’t revisit it on a regular basis. Actively re-visiting and re-evaluating your budget plan will stop you from spending money you can’t afford. At the end of each month, it’s a good idea to draw comparisons between the revenue projected and actual revenue. Similarly, you should review your actual expenses against your budgeted ones. This then will make you aware of any unexpectedly high turnovers or shortfalls.

We hope this checklist has taken the dread out of budgeting for your business, and you can begin the financial year with a clear plan and a good grasp of your business’ financial situation. For more business advice and insights, see our news page on our website.

To find out how Capital Space could benefit your growing business,

call 0800 107 4667 or email info@capitalspace.co.uk