Budgeting for success: why good financial management matters

A useful business budget does not need to be complicated.

You do not necessarily need specialist budgeting software. A clear breakdown of expected income and expenses in a spreadsheet may be enough to get started.

When preparing your budget:

• Estimate your expected sales and other income for the year or relevant budget period.
• Calculate your fixed costs, including expenses such as rent, insurance, software and utilities.
• Estimate variable costs, including stock, materials, marketing and other costs that change with business activity.
• Include wages, superannuation, tax payments, finance commitments and any planned purchases.
• Allow some room for unexpected expenses and changes in costs.
• Set reasonable spending limits based on the income and costs you expect.

A budget should not be prepared once and then forgotten.

Review it regularly and update it as the business, its costs and its priorities change.

Preparing the budget is only the first step.

You also need current accounting records so you can compare what actually happened with what you expected to happen.

Cloud accounting software such as Xero can help you record income and expenses as transactions occur. This gives you more current information when reviewing the budget and the financial position of the business.

To improve the way you track performance:

• Use your chart of accounts to record income and expenses consistently.
• Compare actual spending with the amount budgeted for each area.
• Review where costs are higher than expected.
• Identify subscriptions or services the business may no longer need.
• Consider whether supplier rates or other recurring costs should be reviewed.
• Look for seasonal patterns in income, expenses and cash flow.
• Update the budget when the assumptions behind it are no longer reasonable.

The earlier you identify a difference between the budget and the actual result, the more time the business has to respond.

It is important to maintain a clear separation between business money and the owners’ personal finances.

This makes it easier to understand the true financial position of the business and reduces confusion when transactions are reconciled and reviewed.

Practical steps include:

• Using a dedicated business bank account for business income and expenses.
• Paying supplier bills and other business costs from the business account.
• Avoiding personal spending through business accounts wherever possible.
• Keeping clear records of money paid to or received from owners.
• Using a business debit or credit card for business-related purchases.
• Regularly reconciling the business bank accounts and credit cards.

Keeping transactions separate makes it easier to track expenses, review the budget and maintain accurate accounting records.

Historical financial information shows what has already happened.

Forecasting uses that information, together with your expectations for the future, to estimate what may happen next.

A cash-flow forecast can help you:

• estimate the cash the business expects to receive
• plan for upcoming wages, supplier payments and overheads
• allow for future tax and debt commitments
• prepare for seasonal increases or decreases in activity
• identify periods where cash may be tight
• understand whether additional funding may be required
• assess whether the business can afford a planned purchase or investment
• consider the likely effect of a significant business decision before committing

A forecast will not predict every outcome.

Its purpose is to give business owners a clearer view of the likely financial position so decisions can be made earlier.

Financial management becomes more difficult when records are not current, spending is not measured and the business does not have a clear view of the months ahead.

We can help you:

• improve your accounting records and financial reporting
• prepare practical budgets
• compare actual performance with the budget
• build cash-flow forecasts
• understand what the numbers mean for the decisions in front of you

Speak with our team about preparing a budget and financial reporting process that is practical and useful for your business.