How to ride the current business environment is becoming increasingly challenging. Most businesses will occasionally face unpredictable expenses and unexpected events. A robust budget will help navigate these challenging, and sometimes exciting times. A proper budget enables businesses to make informed decisions about everything from how many people they can afford to employ, to the investments they can make.  It can also help secure external investment or funding to achieve your company’s goals. There are software and systems offering the financial support business needs to achieve and maintain sustainable growth.

The different types of budget

It might surprise you to learn there’s more than 1 form of budget. Depending on who you ask, there can be as many as 7 but we’re going to focus on the 4 most common types.

• Static budgets

Favoured by very small businesses, static budgeting uses historical financial data to budget for revenue and expenses expected during a particular time period.

Uniquely, static budgets don’t change, even if there are fluctuations in revenue, expenses or sales.

• Zero-based budgeting

As the name suggests, a zero-based budget starts from scratch for each line item and every time period.  This approach uses internal and industry financial data to build a new budget based on the conditions at the time.

• Performance-based budgeting

This approach compares the input of resources with the output of services or a product, aiming to achieve maximum profit.

• Value proposition budgeting

This system is all about making sure that everything included in the budget delivers value within a specific range for the business and avoids unnecessary spending.

Your business’ performance and your budgeting process

The health of your business has a major influence on which budget you adopt. Both will determine the allocation of resources and the firm’s direction of travel.

If your key metrics are showing that sales are up and revenues are growing, then you’re more likely to use a performance-based budget to put in place future targets and goals.

However, if performance is down, the zero-based method enables a focus on shorter-term goals and strategies, enabling more responsive decision making about whether to hire staff or invest in new software or premises. 

What makes up a budget?

There are many ways to set out your business’ financial planning. Whichever you choose, there are 3 key ingredients that you should include to generate an effective budget.

1.    Revenue

Include all the money your business makes from services or sales, as well as profits related to investments and any interest accrued.

You can take a bottom-up approach, in which low-level customer information is used to predict future performance, or use the top-down method, working down from high level market data to estimate revenue.

2.    Expenses

This should include variable costs, such as energy and water, materials and supplies. Factor in fixed, recurring costs such as rent, insurance, loans and interest payments. It should also include wages which, although not technically a fixed cost, can behave in the same way.

It’s also worth taking into consideration investment costs. These are outlays that usually occur at the launch stage of a business, and can include costs for IT set-up costs or computers and office furniture.

3.    Profit

Take away your annual expenses from your yearly revenue and the profit is what’s left. It can be a reliable litmus test of your business’ performance.

A good budget should break down a business’ revenue and anticipated expenses either by month, by quarter, or fiscal year.

Bigger businesses should also have budgets for individual departments, monitored either by month or by quarter. These will form part of the company’s overall master budget.

The importance of budgeting

Companies that don’t have a budget or any kind of financial plan in place will find it challenging to be consistently successful, rein in spending and maintain long-term growth.

A business that doesn’t know how much revenue it will make from line items will find it harder to determine whether it can afford the required ad spend, forecast operating expenses or predict a business’ overall business performance.

Only strong budgeting practices can allow that roadmap to be put in place for everyone to follow and monitor, ensuring your business’ solid financial health and its ability to flourish.

 

7 reasons why your business needs a budget

A robust financial plan underpinning your business will do more than provide a roadmap for the future, help attract potential investors and prevent you from spending too much money.

Here are just a few more reasons why your business needs a budget.

1. Prioritise projects

Not every project your business takes on will give as much as it takes. A big project could take up a lot of time for what turns out to be very little return on investment.

A budget should enable you to prioritise those that are predicted to generate the healthiest returns.

2. Allocate resources and cash flow

Knowing what resources your business needs to operate and achieve its goals is a crucial part of good financial planning.

A detailed budget will help identify whether there’s enough cash to hire extra staff for a particular project or whether some larger departmental budgets could be better allocated elsewhere.

3. Set and monitor goals

Your business’ budget should be created with directly related goals in mind, depending on what you’re looking to achieve.

• Do you plan to increase your headcount or revenue by the end of the year?

• Have you got a major new project or client in your sights?

• Do you want to cut expenses and save money, or is your main goal to boost sales?

 Whatever the objective, regular financial updates will keep everyone across the business in the loop with progress and also help inform subsequent budgets.

4. Enable flexibility

Most businesses will occasionally face unpredictable expenses and unexpected events. A robust budget will help navigate these challenging, and sometimes exciting times.

The pandemic saw vast numbers of companies pivot to survive, with budgets reworked and a shift to zero-based budgeting to maximise real-time flexibility.

 A good budget and proper planning process will also allow your business to take advantage of seasonal or other trends, ensuring you make the most money while keeping those expenses under control.

5. Encourage investment

Businesses with little or no history of laying out a careful, detailed budget could struggle to secure external investment. That could potentially have a direct impact on your annual growth plans.

 Being able to document in detail your small business’ plans will help attract investors to your company. They will also appreciate being able to clearly see your business’ ability to budget effectively and evidence you are prudent about what you spend.

6. Improve decision making

Just as a shopper will check their wallet or bank balance to see if they can afford to buy something in the sales, your budget will determine how your business invests your funding.

Having all your company’s financial information at your fingertips is crucial when it comes to writing sound budgets.

It means your business knows precisely how much it can spend on staffing or software, or whether your company spending needs to be reined in.

7. Enhance tax planning

Small businesses that are busy focusing on scaling up can sometimes be caught out by costs incurred from a surprise tax bill. Naturally, it ends up taking a big bite out of their revenue.

 Robust financial planning and a solid budgeting can help avoid such a scenario, ensuring your business has set aside enough to pay all taxes.

Using technology to create budgets

The digital age has seen the development and deployment of software packages that make it easier than ever to set up and implement a budget. As Xero experts, we know how transformative the software package can be for small businesses. It can handle the demands of a business start-up as well as a global company without breaking a mechanical sweat. Using its Budget Manager tool, you can create an overall budget, as well as additional ones such as a divisional budget. Xero will also provide insights into future profitability, your business’ financial position and help track those all-important metrics, all of which are incredibly useful. One of the things we admire the most about Xero is its ability to integrate with other tools and apps. For example:

Syft

A Xero App Partner of the Year, this all-in-one system has lots of attractive features, including the ability to create budgets and forecasts from company information. Want to calculate next year’s marketing spend? This will help.

Futrli

Another direct integration that enables straightforward budgeting in business. Sage-owned Futrli generates live, accurate predictions from a business’ accounting data to create a budget.

Spreadsheets

Digital technology doesn’t just mean an all-in-one app. A start-up may need little more than a simple spreadsheet, listing sales, revenue and outgoings, to build an effective budget. However, as that business grows, the advantages of systems such as Xero become increasingly attractive, especially when it comes to tracking progress in your business.

The benefits of using technology

So what are the benefits of using budgeting software systems? Here are our top 4:

1.    Create a business plan from historic accounting data 

Xero, like Syft and Futrli, uses a business; own historical accounting information, including how much profit was made and expenditure over a given period, in the generation of detailed budgets. This part of the effective budget planning process allows a business to know how much money it can potentially spend in the coming quarter, 6 months or year, for example.

 If you’re looking at launching a new campaign, it’s crucial to know whether your revenue will support those potential costs. If your accounting track record suggests not, then a strategy overhaul may be on the cards.

2.    Predicting the future using formulas and AI

Many businesses would love to have a crystal ball, but digital technology is increasingly helping them better prepare for the future. Formulas and artificial intelligence can automatically generate accurate, reliable insights and predictions into future liquidity or potential revenue from sales. This data provides the foundation for a robust budget that can help a company achieve their goals and stay within their pre-set spending limits.

3.    Easy to update

Unlike paper documents, which are time and labour-intensive to create, online or digital budgeting software is easy to amend and update. That means business decision-making is based on the very latest information, enabling the company to be more nimble and proactive.

4.    Visual reporting

Long lines of numbers can be difficult to interpret and sometimes even lead to confusion when trying to compare company metrics. Cloud-based systems such as Xero turn this data into easy-to-understand visuals that can compare budget with the business’ actual performance, sales or costs.

How we can help you

There’s a big difference between thinking about using software like Xero as part of your budget planning process, and actually implementing it. Most business owners are, of course, experts in their fields but perhaps not accountancy systems. That’s where we come in.

 For start-ups, the biggest challenge can be ensuring all your accounting bases are covered while you build up your small business. Our team can put in place systems and processes that identify high priority items and make sure accounting services like payroll and taxes are taken care of. For business’ that are scaling up or are well established, we can help when it comes to planning budgets that allow your firm to grow or run like a well-oiled machine.

 We’ll help you see how past trends could inform future performance, using realistic reports generated by Xero and its integrated apps. As well as saving you time, costs and effort, these streamlined methods can also help identify new strategies or chase new business that could have a positive, direct impact on your company.

Get in touch and let’s get the ball rolling……

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