We all have different strengths and weaknesses. Some small business owners will be financially savvy, others less so.
A question that comes up sometimes is budgeting and forecasting, as part of managing your personal finances. For many its common sense, but for others a budget may as well be double dutch.
Here are some thoughts as to how a small business could produce a simple annual budget.
First is a “Bottom up Budget” – thats to say you start with outgoings and work up to income; the second is “Top Down Budget” – thats to say you start with income, deduct outgoings and see whats left.
Do you need monthly forecasts and budgets?
These examples are annualised budgets, and should not be confused with cash flow forecasts or periodic budgets. Do you need monthly forecasts and budgets? Well, some businesses with large fixed outgoings and maybe bank borrowing, vat payments, quite possibly yes.
For other small businesses, that would probably be overkill and an an annual budget is adequate.
Bottom Up Budgeting
Here we start with expenses and work up. A typical approach might be:
- Work out regular personal monthly expenses – accommodation, food, travel, personal spending.
- Add to this savings and contingency goals
- Don’t forget pension provision, savings for tax and similar
- This subtotal is the cash you need to generate from your business annually
- Next add in business expenses
- The final sub total is your target business revenue annually
- You can then break that down on a convenient basis depending on the nature of your business, eg you may want to break down into an hourly revenue target, weekly revenue target, or job / project based target.
Of course, the world doesn’t come in need packages so you need to allow for some months being quieter than others, but this is a guide to work to.
Also, its worth emphasising, that this approach helps you work out your minimum annual business revenue – if you achieve more then thats great.
Top Down Budgeting
Here we start with income and work down. A typical approach might be:
- Estimating your annual business income – maybe build up from estimated working hours a year or estimated jobs a year – or maybe you just know what you tend to bring in.
- Take off business expenses
- You are left with an estimate of business profits
- At this point you may want to add in other income – eg from a part time job
- Next take out fixed monthly living costs, and then fixed monthly savings, eg pension and tax
- Whats left is your free money for discretionary spending
Again, use the figures with caution – remember figures in a budget can change.
Examples and Template
Although these are based on a Yoga Teachers business, the same principles apply across the board.