How to make a business budget

business.gov.au defines a budget as a listing of planned revenue and expenditure for a given period, and describes a business budget as your financial plan for the year ahead.

It says a budget also helps you:

• set goals for the business
• decide where to put your money
• keep track of the business's financial health
• apply for finance from banks and investors.

The two are easy to confuse. business.gov.au explains that a budget is a plan for what you want to earn and spend in the financial year, while a forecast estimates what is likely to happen, based on your latest figures and recent trends.

Each has its own job. The budget helps you set goals and decide where money goes, and you use it to see how closely the business is following the plan. The forecast helps you manage cash flow and respond to changes, so business.gov.au suggests updating it more often, monthly or quarterly, while the budget is written once a year.

business.gov.au lists what to have ready so the budget is accurate and useful:

• clear business goals, to guide your spending decisions
• details of your fixed costs, such as insurance, rent and car leases
• estimates of your variable costs, such as wages, utilities and supplies
• an estimate of the income you expect to make.

Historical figures help with the estimates. Your profit and loss statement shows the income and expenses recorded last year, and month by month if your books are kept that way. business.gov.au notes that a new business without that history can use market research or industry benchmarking to find typical income and costs for its industry.

business.gov.au offers a free budget template as a spreadsheet, and budgeting software is another option. Whichever you use, the steps are much the same.

1. Set out the year: a column for each month of the financial year and a total column, with income lines at the top and cost lines below.
2. Estimate income for each month. Allow for busy and quiet times rather than spreading a yearly figure evenly.
3. Enter fixed costs in the periods when they will appear in the profit and loss statement you will compare with the budget. Ask your accountant how an annual cost such as insurance is spread across those periods. Keep payment dates in a separate cash flow forecast.
4. Estimate variable costs. Costs such as supplies tend to rise and fall with sales, so tie them to your income estimates.
5. Total the costs and take them away from income to show the planned result for each month and for the year.
6. Check the result against your goals. If the plan falls short of them, revisit the estimates or the goals before you settle on it.

business.gov.au stresses comparing your actuals, the real income and costs, with your budgeted figures. It suggests setting time aside each month to check spending against the original budget, and points to the profit and loss statement as the place to find the actual figures.

In this example, costs are close to plan overall, but income has come in below budget, and that explains most of the gap in the result. The next question is why: a quiet month the business expected, or the start of a trend?

business.gov.au also suggests analysing the budget for seasonal patterns, which can help you judge when to change prices or add a new product or service.

A budget earns its place when it changes what you do. business.gov.au suggests two broad responses.

• If you are spending too much: limit spending to what is essential to running the business, and look for cheaper ways to pay for the essentials, such as changing supplier.
• If you have money left over: pay off debt, set money aside for emergencies or put it towards growing the business.

It also suggests adjusting the budget as needed to keep costs and income on track. When you change it during the year, keep a copy of the original so you can still see how the year turned out against the first plan.

business.gov.au suggests writing the budget once a year and considering a mid-year review. Separately, it recommends a financial health check at least once a year, reviewing the budget alongside the balance sheet, the profit and loss statement and the cash flow statement.

In that check, it suggests looking for trends and anything unusual, such as:

• falling sales
• low profit margins
• more spending than you budgeted for
• the amount of existing debt
• periods of high or low cash flow.

Each of these leads back to a line in the budget, and to a decision about next year's plan.