Budgets and Cash Flows – why they’re important to every business!
Are my business expenses too high? Will I have enough money to grow my business? Am I making a profit?
When you are asking these questions of your business, a budget has the answers. A budget will tell you how to direct your money to where it’s needed most.
How to create a budget
There are a number of things you’ll need to know to put a budget in place:
Choose a time frame for your budget. Whether you choose monthly, quarterly or yearly budgeting will depend on the needs of your business.
Enter all your fixed expenses like your salary, rent, insurance and any other known costs.
Tip: When starting out and deciding on your salary, find a balance. Consider what you would pay someone else to manage your business and pay yourself that amount.
Enter all your variable expenses like utilities, direct costs of materials and staff wages. If in doubt, estimate the maximum amount you expect to spend on these expenses over the budget period.
Tip: If you can, turn your variable costs into fixed costs. It may end up saving you money and will become an expense that you know to expect.
Enter your expected business income over the budget period. Once your business has been running for a while you can review past periods to have a good idea of what income to expect.
Tip: Be conservative when predicting your income – give yourself some wriggle room in case things change.
Record the actual income and expenses during the budget period. Then, calculate the difference between your budgeted amount and actual income and expenses.
Throughout the budget period make sure you keep an eye on how you’re tracking against your budget. If you’re spending too much, look for ways to cut costs and avoid spending money on anything that isn’t essential to running your business. If you have extra funds, look at how to reduce debt, create a financial safety net or grow your business.
Tip: analysing your budget will help you find seasonal patterns. You can see if decisions like changing prices or adding a new product or service, are the right ones.
Budgeting and forecasting
Financial reports or statements are crucial for tracking the financial health of your business. They’re also important for setting goals, making sound business decisions and obtaining finance.
While you may rely on an accountant or bookkeeper to prepare your financial statements, always check them carefully for accuracy and ask questions. With your knowledge of your business and some financial training, you can ensure that your statements are up to date and accurate.
Budgeting vs forecasting
Your budget is your planned revenue and spending, and allows you to allocate funds for specific purposes that you often know in advance. Consider preparing a budget quarterly or yearly.
A forecast may occur on a more frequent basis (often monthly). The figures used in the forecast predict past and current trends in your financial statements. A forecast can give you a more realistic measure of where your business is heading and can help you to avoid problems before they occur.
Cash flow forecasting is one of the most important forecasting tools for business and can also help you keep on top of your bills. It is very useful when seeking finance, as it shows lenders you have the capacity to pay them back.
Cash flow statement
A cash flow statement can be one of the most important tools in managing your finances. It tracks all the money flowing in and out of your business and can reveal payment cycles or seasonal trends that require additional cash to cover payments. This cycle or pattern can help you plan ahead and make sure you always have money to cover your payments.
On your cash flow statement, list all your incoming and outgoing cash items with the dollar amount for the next 12 months. For each month list the items and total the figures under the headings Cash incoming and Cash outgoing. Use the outline below as your starting point for
your cash flow statement for each month:
- Opening balance (in the first month this will be your opening bank balance. In subsequent months this figure will be the closing balance from the previous month)
- Cash incoming
- Asset sales
- Debtor receipts
- Other income
- Total incoming (Add up all cash incoming items above)
- Cash outgoing
- Purchases (Stock etc)
- Accountant fees
- Advertising & marketing
- Bank fees & charges
- Interest paid
- Credit card fees
- Utilities (electricity, gas, water)
- Lease/loan payments
- Rent & rates
- Motor vehicle expenses
- Repairs & maintenance
- Stationery & printing
- Membership & affiliation fees
- Income tax
- Wages (including PAYG)
- Total outgoing (Add up all cash outgoing items above)
- Monthly cash balance (Calculate Total incoming minus Total outgoing)
- Closing balance (Calculate Opening balance plus Total incoming minus Total outgoing)
Whether you’ve already started or intending to start, you’ll need to fill in actual or estimated figures against each item. If using estimated costs, you’ll need to label them clearly. When preparing a cash flow statement, ensure you also clearly state whether your figures are GST inclusive or exclusive.
Here’s a great template to get you started!
Source: Adapted from information on the Australian Government Business website (https://www.business.gov.au/).