Explained: Why budgeting is important for business

Budgeting is integral to any business, both for longevity and running successfully. From being able to pay taxes to payroll, having money put aside is vital.

Getting a good grip on business finances is often the most daunting part of setting up and running your own business, so in this quick guide we’ll explore the basics, including:

• Definition of budgeting for businesses
• What you should budget for in your business
• The benefits of budgeting
• Different types of budget
• How to create a budget for your business

Budgeting definition in business

A budget in business is simply a financial plan. This plan takes into account expenditures and outgoings such as; overheads, taxes and staff wages and predicted income so you can save money accordingly. In a nutshell, you look at what you need to spend and make sure money is put to one side to cover those costs.

Unfortunately, not having a solid budget can lead to business turning over a loss financially, or even end up bankrupt.

What should I budget for in my business?

There’s five factors you should take into account when creating your budget, these are:

1. Payroll - This is for staff salaries i.e. the amount you pay your staff.
2. Repaying business loans - For example, if you’ve had financial support to start-up or continue your business and are required to repay the money to an external lender.
3. Rent - If you don’t own your property or land, you’ll likely be paying rent.
4. Insurance - Depending on the type of business you run or own, you may need multiple types of insurance.
5. Taxes
6. Business rates - These are non-domestic rates, set by the government and collected by local authorities. Check out our guide for more detail.

Benefits of having a budget for your business

Having a budget for your business isn’t just crucial to ensuring your business turns over a profit and that your outgoing payments are made, it can also help your business reach other milestones.

Here’s an overview of the benefits a budget provides businesses:

• Meet financial objectives and targets
• Helping to achieve long-term goals
• Preparing a financial buffer in case of emergencies
• Setting business goals
• Helping to secure funding or investment
• Identifying problem areas
• Preventing overspend
• Monitoring performance and reporting
• Helping to effectively allocate resource

Budgeting for small businesses

Businesses of all sizes use budgets but if you’re just starting out here’s an overview of the different types of budget available.

Different types of budgeting in business

• Master budget - Accounts for all costs for the financial year.
• Operating budget - The costs to run a business over a specific time period, using revenue and expenditure.
• Cash budget - An estimation of cash flow.
• Labour budget - Looks at the billable revenue your staff will bring in over a specified period.
• Static budget - Accounts for expenses and income that will not change.

How to create a budget for your small business

So, if you’re in the process of developing a startup or own a small business, here’s a top-level overview of how to create a budget for your small business in six steps:

1. Identify all costs and expenses (monthly and annually) - Every financial outgoing needs to be considered. These should be broken down into fixed/non-negotiable costs that do not change such as rent, staff wages and insurance. You may also need to account for variable costs such as cost of materials, freelance staff or contractors.
2. Research and benchmark industry standards - What type of costs are normal for businesses to spend on different costs within your industry? This part will require a lot of research and comparison of prices from different supplies to make sure you’re paying market-rate, but should give you a rough idea of how much you should be spending.
3. Account for one-time costs - This is particularly relevant to new businesses and may include things like equipment.
4. Project income and revenue - Using either historical data or any confirmed business/income that you know you are getting, such as a startup loan, business funding or pre-approved job bookings/sales.
5. Profit and Loss - You can then use the above to create a profit and loss statement, and balance sheet yourself or ask for help - use a professional or budgeting software to ensure no errors or oversights occur.
6. Budget adjustments - Using all of the information you've gathered, you can now work towards adjusting budgets accordingly to maximise profit and meet overheads.