More than half of businesses fail due to inadequate funding or other financial issues. This statistic demonstrates the importance of balancing your budget to increase the likelihood of growing a profitable business. In order to improve the financial position of your business in 2018, you’ll need to create and maintain a balanced budget. A budget that’s properly balanced helps you to cope with downtimes caused by factors like seasonal fluctuations or waiting for payments from your customers.
By identifying your available capital, likely expenditure and expected revenue, you’ll be in a good place to plan the financial position of your business. Taking the necessary time to balance your business budget is an effective way of determining how to achieve your monetary goals and the amount that should be spent on different parts of your business.
A balanced budget has several benefits for you and your business. Firstly, it reduces stress, as you’ll be aware of the financial state of your business and can determine if corrections are required. You’ll also be more likely to spot accounting mistakes early when you have a balanced budget. Keeping a keen eye on your business finances is vital for making decisions about whether you can expand or have enough to fund your existing operations. Failing to balance your business budget will leave you at risk of the potentially catastrophic situation of continuing to spend more than you’re taking in.
A balanced business budget in 2018 will also help you to:
- Predict cash inflows and outflows
- Prepare to file tax returns and make payments
- Identify your financing needs
- Discover expansion opportunities
- Measure your business performance
Business owners generally have different systems and processes to balance their budgets. But there are some general principles that most budgets should contain in order to balance. For instance, the majority of business owners will have standard expenses like:
- Rent or mortgage payments
- Utility bills
- Payroll expenses
The overall goal of balancing your business budget in 2018 is to determine your average weekly or monthly expenses, for items like overheads and labor costs, and forecast how much profit you will make.
Here are six tips to help you balance your business budget in 2018:
1. Reassess last year’s budget.
Conduct a review of your 2017 budget to change the things that didn’t go well and repeat and improve on the areas that worked. You should go through your budget carefully to find out whether it matched your actual business income and expenses. To ensure that you have an accurate picture of the effectiveness of your 2017 budget, take the following steps to prepare for the review:
- Post every invoice, receipt, and income accurately into your accounting system. You’ll then need to reconcile your bank statements with these entries. You can either make these entries yourself or hire a bookkeeper for this job.
- Either way, you need to get this right to avoid getting a distorted picture of your finances.
- Run a variance report to show the difference between your budget and the actual position.
- Review your variance report. Your accounting software should break down the variance by months. You can take a closer look at monthly variations to help inform your 2018 budget.
2. Project your income sources.
If you’re already in business and have reviewed your previous budget and variance reports, you’ll have a good idea of how much money your business is expected to make each month in 2018. It’s critical to understand how much your business is expected to take in on a monthly basis to:
- Prevent you spending too much.
- Help you estimate how much to invest in staff, products and other activities that can grow your business.
- Balancing your business budget in 2018 will make it less likely to overestimate or underestimate your financial situation. Both of these incorrect assumptions can have negative consequences for your business.
Your list of income sources should include everything that brings money into your business. In addition to your sales figures, other sources of income could also include:
- Investment income
- Hourly earnings
3. Figure out your fixed costs.
Fixed costs are outgoing expenses that don’t depend on the output of your business.
Some common examples of fixed costs are:
- Business premises rent or mortgage
- Staff pay
- Website hosting
Fixed costs are some of the easiest to identify and budget for. It makes sense that most business owners prefer to have the majority of their costs fixed. Knowing how much should be coming out of your business every month makes managing your budget simpler. It’s recommended that, wherever possible, you make business costs fixed. For example, if you provide cell phones to your workers on a pay-as-you-go basis, the cost will be variable. However, you can change this to a fixed cost by switching to a monthly plan.
It’s possible for the costs relating to your assets to be both fixed and variable. An example is if you use a fleet of vehicles for your business. In this instance, there’ll be the fixed costs of insurance, but gas costs will be variable because of changing prices and the distance traveled.
Although fixed costs are some of the easiest costs to identify, you still need to be aware of some issues when balancing your business budget for 2018. Calculating the true fixed cost of a business asset isn’t always as straightforward as it seems. A case in point is if you’ve budgeted for a new piece of equipment as a fixed cost and you need specialist workers to operate this machinery. If you haven’t accounted for this labor, your budget won’t be a true picture of your costs.
Another pitfall to watch out for when budgeting fixed costs, is failing to make allowances for adjustments. Your fixed costs are unlikely to change on a short-term basis. However, if you’re planning to grow your business in 2018, your fixed costs could change if you employ more workers.
The nature of fixed costs could lead some business owners to believe that they can be set once and then be forgotten about. However, it’s important to review your fixed costs on a regular basis in line with changing plans to keep your budget balanced in 2018.
4. Tally your variable costs.
After you’ve identified your fixed costs, it’s time to look at your variable costs. Fixed costs stay the same, but variable costs fluctuate from month to month. They are affected by your sales and increase when your sales go up and decrease if your sales go down.
Here are some examples of variable costs:
- Commission – The more sales your employees who are on commission make, the more you have to pay out.
- Shipping and packaging – As customers order more products, you’ll need to pay more for shipping and packaging.
- Credit card fees – When the number of customers who pay with credit cards increases, you’ll need to pay higher credit card processing fees.
If you’ve budgeted correctly, the rise in variable costs should be good news for your business. Increased variable costs mean that you’re doing more business and generating more revenue. Your revenue needs to increase quicker than your variable costs to make a profit. You’ll also need to work out your variable contribution margin, which is the difference between variable costs and revenue.
You can determine your variable contribution margin by:
- Looking at the price of your service or product.
- Finding out the variable cost of your items.
- Subtracting the variable cost from the price.
Consult your accountant or bookkeeper if you’re having difficulty accurately budgeting for your variable contribution margin for 2018.
5. Expect one-off expenses.
It’s impossible to predict every expense your business will incur. No amount of reviewing previous budgets will stop the unexpected from happening. These one-off expenses normally happen without notice and can result in a financial burden on your business.
Planning for one-off expenses should be a continuous theme in your budget to deal with unexpected costs like:
Using more costly temporary workers to replace permanent staff who leave without the required notice.
- Fixing or replacing faulty equipment.
- Repairing a company vehicle that has broken down.
- Balancing your business budget should include a ‘rainy day’ fund to cover costs that suddenly appear. Preparing for unforeseen circumstances will safeguard against the derailment of your business plans for 2018.
So, as well as putting aside money for taxes, you should also aim to save a dedicated percentage of your revenue every month to deal with unexpected expenses.
6. Keep reviewing your budget.
Balancing your business budget in 2018 is more than a one-time review of your income and expenditure. You need to keep a watchful eye on your budget to make any required changes. Deputy makes it easy to build custom reports through extracting any data you see fit – to either save in your account for reference, or export to Excel. You can choose from the following intervals for your budgetary review:
- Daily – Reviewing your budget every day may seem like overkill, but this would be useful if your business is experiencing challenging financial times. This level of focus on your finances will help you to manage your cash flow and balance your budget. You’ll be in a good position to take the required action to get your business back on track when examining your budget on a daily basis.
- Weekly – Taking a weekly look at your budget is a good idea. Reviewing your budget every week for a given period (say, three months) will provide in-depth knowledge of how your business finances work. The more awareness you have about what’s going on with the money coming in and out of your business, the better you can minimize risk and plan effectively.
- Monthly – Most business owners choose to review their budgets on a monthly basis. A monthly budget review gives you a good idea of how your business is performing and still gives you time to take corrective action if necessary.
- Quarterly – If your business is in a great place financially, then you may be comfortable with reviewing your budget every three months. Because changes can happen very quickly in business, it may be a good idea to review your budget on a monthly basis instead of quarterly. If you’re leaving three months between budget reviews, you’ll have less time to maneuver and make changes if you spot something going wrong.
The time period you choose to review and balance your business budget depends on your situation. Checking-in on your budget just once a year isn’t recommended as you’ll leave yourself in a weaker position to take advantage of opportunities and avoid threats in a timely fashion.
Balancing your business budget in 2018 doesn’t have to be complicated. It’s a vital process to ensure that you have the money to keep your business running, experience growth, stay ahead of your competitors and have enough cash to cope if and when the unexpected happens.