What is budgeting for your new business?
The purpose of your budget is to try and understand what money will come in and out of your business over a period of time; this might be over 1 year or more. It incorporates all of your income from things like sales revenue and loans, as well as all of your costs such as stock, premises, marketing and salaries. Ideally, your budget will aim to keep costs below income, but this might not be feasible in the first 12 months. Ultimately your budget is there to try and ensure your business is profitable.
What will my budget process tell me?
- The investment required to start your business
- Your breakeven point – the required sales to cover costs
- When you can afford to employ people or invest in your business’s growth
Check out our infographic to find out what goes into a budget.
What is a cash flow and why do I need one?
Whilst the profit & loss (P&L) and balance sheet are the main elements of your budget, it’s also important to know what cash you have coming in and out at any one time, that’s where a cash flow comes in. By understanding when you’re due to be paid for things and when you need to pay bills by, you can ensure you have enough cash in the business to cover your costs. Many businesses find they are short of cash at times, such as during seasonally low sales periods or times of high cost (such as VAT returns). By managing cash flow in the business you can ensure you plan for these low cash periods.
Hang on, so how does this differ from a forecast?
When you’re starting a business your budget and forecast might be the same. But as your business develops you budget will be about planning where you want the business to go. It is usually based on commercial and financial objectives.
Your forecast is based on where your business is actually going based on what has already happened.
Your forecast will likely include actuals vs. budget for previous months so that you can re-forecast what the rest of the year will look like and predict your end of year revenues and profits.
Download our FREE Balance Sheet and Profit and Loss Account templates below.