Budgeting is one of the most spoken about topics when it comes to running a successful business, and for good reason. Budgeting allows you to keep your business running, pay all your bills and suppliers on time, and it lets you achieve your business goals.
Beyond that, effective budgeting contributes towards your business’s bankability. When your business is able to demonstrate financial strength, the chances of accessing funding and collaborative opportunities open up.
Whether you’re starting out or you have an established business, understanding your budget is essential. In this article, we’ll break down what a practical business budget should include.
Start With Revenue
Revenue is the money your business earns. Your budget starts with revenue. If your business is new, estimate revenue from research. If your business has been running for some time, use past sales.
When analysing your revenue, look at the following factors:
- Which months have the most sales?
- Which months have the least?
- Do customers pay immediately?
- Does one client bring most of the money?
For instance, if you own a nail salon, you may have many clients during December and experience a slow January. Your budget must be prepared for such seasonal changes.
Estimate revenue carefully. If your estimates are too high, it can cause problems.
List All Fixed Costs
Fixed business costs are the expenses in your business that do not change. This means that these costs stay the same every month. You must pay them even if sales drop.
Examples include the following:
- Rent
- Salaries
- Insurance
- Internet
- Software
- Loan repayments
If your fixed costs are R60 000 per month, your business must earn R60 000 to survive. However, it’s very dangerous to break even as a business. Ensure that you have a healthy amount of cash flow to survive emergencies and any unforeseen circumstances. Knowing fixed costs shows the minimum income your business needs.
List All Variable Costs
Variable costs are the costs that change depending on business activity. These are the costs that rise when sales rise. These costs fall when sales fall.
Examples:
- Raw materials
- Stock
- Delivery costs
- Packaging
- Sales commission
If you own a bakery, you buy more flour and sugar when sales rise, and you buy less when sales fall. Tracking variable costs helps control spending.
Include Cost of Sales
Cost of sales is the direct cost to make or deliver your product or service. Let’s take it back to the cleaning business example. The direct cost of sales for a cleaning business would be the cost they pay for cleaning supplies.
Calculate your gross profit by subtracting the cost of sales from your total revenue. Gross profit shows if your prices work. Low profit margins make growth hard.
Plan for Tax
Business taxes must be part of your budget. If your business is registered with the South African Revenue Service, you must pay taxes.
Examples:
- Value Added Tax
- Pay As You Earn for employees
- Provisional tax
- Corporate income tax
Save a part of your income each month for tax. Keep this money in a separate account. This prevents stress when tax payments are due.
Track Cash Flow
Cash flow shows how money moves in and out of the business. Positive cash flow means income is higher than spending. Negative cash flow means spending is higher than income.
If your nail salon earns R100 000. You spend R45 000 on rent, salaries, and supplies. You have R55 000 left.
Cash flow tracking helps spot problems and controls spending.
Budget for Growth
A budget should include money for growth. Growth may need spending on:
- Marketing
- Equipment
- Staff training
- New services
If you own a nail salon, you can grow your nail salon by offering nail courses. You may start new services like adding massages or makeup. When you budget for growth spending, you can create opportunities.
Create an Emergency Fund
Unexpected costs happen. Your equipment can break, suppliers can increase prices, and customers can pay late.
Save a small emergency fund. You can start with five to ten percent of your monthly expenses and grow your fund as your business makes more money. This fund helps the business stay stable.
Review the Budget Often
A budget must be updated. Make sure you check it every month, compare planned numbers with actual numbers.
Review your budget by analysing the following:
- Did sales match estimates?
- Did expenses rise?
- Are some costs too high?
- Regular reviews help fix problems early.
What Should a Business Budget Include?
A simple budget that you start off with shows the following:
1. Monthly revenue: This is the money you expect to earn each month. Track it carefully to know how much comes in.
2. Cost of sales: These are the direct costs to make or deliver your product. Subtract them from revenue to see your true profit.
3. Gross profit: This is what you have after the cost of sales. It shows if your prices cover your costs.
4. Fixed costs: These are expenses that stay the same every month. You must pay them even if your income falls.
5. Variable costs: These costs change with your sales or activity. Track them to control spending during slow months.
6. Tax savings: Set aside money each month for taxes. Keep it in a separate account to avoid surprises.
7. Loan payments: Include monthly payments for any loans. This ensures you never miss a payment.
8: Growth spending: Set money aside for business improvements. Use it for marketing, new services, or staff training.
9. Emergency fund: Save a small portion of your budget for problems. This helps the business stay stable in hard times.
10. Net profit: This is what remains after all costs and expenses. It shows your business is making money.
Control Your Budget and Grow Your Business
Having a budget is essential for every business as it helps manage spending. When you have a budget that you follow strictly, your business can handle the difficult months. Don’t take the risk of assuming there won’t be any difficult months. Beyond surviving difficulty, you can plan growth. Additionally, when you seek funding, showing evidence of financial discipline is a good sign for potential investors.
