One of the basics of running a successful business is setting a budget each year. Without one, it’s easy to muddle through and simply hope this year’s results are better than last year’s. A budget helps you take control of your business by setting targets, thinking about how you’ll achieve them, and tracking your progress throughout the year so you can stay on track to achieve your goals. 

How do you go about creating a budget?

The easiest way to put together a budget is to use your actual results from last year as a starting point. Export a month-by-month Profit and Loss report from your accounting software and this will give you the structure for your budget for the year. Run through each line of the budget and consider whether the same amount as last year is reasonable to expect this year.

• Have there been any price increases due to inflation?
• Have you hired additional staff or do you need to factor in pay rises?
• Are there any expenses you know you’ll have this year but didn’t have last year?

Change the figures as appropriate.

What do you want the net result of the budget to be?

Whether you are the owner of the business or employed as a manager in the business, you want the business to return a profit. Increasing profit year on year will usually have a direct impact on your own income, whether that’s through dividends, shareholder salary, bonuses or pay rises. So that’s the first goal.

Look at the budget you’ve created from last year’s actuals, decide what you want the bottom line to show, and work backwards from there. In order to grow your profit, you’re going to want to do a combination of increasing revenue and decreasing costs. Just be careful not to prune back too many costs that you may need to keep your business operating optimally.

How can you impact the revenue side of your budget?

Now you’ve set what profit you want to achieve for the year, you’ll know what level of revenue you need to bring in. Consider which levers you can pull to meet that revenue target. 

• Can you offer existing customers additional services? 
• Can you set up some meetings with people of influence that could become referrers for you?  
• Can you increase your advertising spend or improve your website? 
• Can you blog more regularly to showcase your expertise in a subject? 

There are many ways to grow revenue, but the key is identifying which activities will generate the best return for your business. 

How do you monitor whether you are keeping on track with the budget?

There is little point in preparing a budget if you don’t check in to see if you are meeting the targets. That’s where budget variance reporting comes in. In Xero, you can import your budget and prepare a report each month to show you how your actual results compare to the budget you set. This will show you whether you’ve under budgeted for some costs or if you aren’t meeting your revenue targets. You can adjust the budget as you go and change your activities accordingly.

At the Accounting Hub we can help you with this whole process from start to finish or just the parts you need support with. Get in touch if this is something you’d like us to look at.