Running a small business in New Zealand comes with unique challenges and opportunities. One crucial aspect that determines the success of a business is effective budgeting. Whether you're just starting or looking to streamline your financial processes - creating and maintaining a budget is essential. Here’s a guide to help you understand, create, and manage an effective budget for your small business.
What is a Budget?
A budget is a detailed financial plan outlining your expected income and expenses over a specific period. Your budget serves as a roadmap, guiding your financial decisions and helping you allocate resources effectively. A budget is a vital tool to:
Track the performance of your small business
Manage cash flow your cashflow
Ensure long-term sustainability and growth of your business
Why is a Budget Important for Your Business?
1. Financial Control
A well-prepared budget gives you control over your finances. It helps you monitor your income and expenditure, ensuring that you don't overspend and can meet your financial obligations on time. Sounds like a dream right?
2. Strategic Planning
Budgeting allows you to plan strategically. By forecasting future income and expenses, you can make informed decisions about investments, expansions, and other significant expenditures. In other words, it helps you make the right decisions for the growth of your small business.
3. Performance Measurement
With a budget in place, you can measure your business's performance against your financial goals. This comparison helps you identify areas where you may need to cut costs or where you can invest more.
4. Improved Cash Flow Management
A budget helps in managing cash flow by predicting when money will come in and go out. This prediction allows you to plan for periods when cash flow might be tight and take corrective actions in advance.
5. Risk Management
With the uncertainty of the economy managing your risk should be a high priority. Having a budget helps you anticipate potential financial challenges and prepare for them. It enables you to set aside funds for emergencies, reducing the impact of unforeseen expenses on your business.
How to Start Creating a Budget
Starting a budget can seem daunting, but breaking it down into manageable steps can simplify the process. We recommend getting your accountant or bookkeeper to look over your budget to make sure nothing is missing.
Here’s how to get started creating a budget for your small business:
1. Set Clear Goals
Determine what you want to achieve with your budget. These goals could include increasing revenue, reducing costs, paying yourself or saving for future investments.
2. Gather Financial Information
Collect all relevant financial data, including income statements, expense reports, bank statements, and any other financial records. This data will provide a clear picture of your current financial situation. These can be found in your Xero or MYOB account.
3. Identify Your Income Sources
List all your income sources, such as sales revenue, services provided, and any other streams of income. Be realistic in your estimates to avoid overestimating your revenue.
4. List Your Expenses
Categorise your expenses into fixed and variable costs. Fixed costs include rent, wages, and bills, while variable costs include supplies, marketing, and travel. This categorisation helps in understanding where you can cut costs if necessary. If you have a bookkeeper or an accountant working with you this should already be done on a regular basis.
5. Plan for the Future
Based on your gathered data and business goals, forecast your future income and expenses. Consider seasonal trends, market conditions, and potential changes in the business environment.
Steps to Prepare Your Small Business Budget
1. Create a Budget Template
Use a spreadsheet or budgeting software to create a budget template. Include sections for income, fixed expenses, variable expenses, and savings.
2. Fill in the Numbers
Input your estimated income and expenses into the template. Ensure you account for all possible costs, including taxes, insurance, and miscellaneous expenses.
3. Review and Adjust
Once you have filled in the numbers, review your budget. Compare it against your financial goals and adjust where necessary. Ensure that your income covers your expenses and that you have a buffer for unexpected costs.
4. Implement and Monitor
Put your budget into action and monitor your financial performance regularly. Track your actual income and expenses against your budgeted amounts and make adjustments as needed.
5. Review Periodically
Regularly review your budget, at least quarterly. This review helps you stay on track with your financial goals and make necessary adjustments in response to changes in your business environment.
6. Get a Second Opinion
If you find yourself struggling to hit your budget targets, overspending or underspending, it’s worthwhile getting a second opinion. We recommend getting in contact with your bookkeeper or accountant who can provide insight and recommendations to improve your budget.
Our Top Tips for Effective Budgeting
1. Be Realistic
Set realistic income and expense expectations. Overestimating income or underestimating expenses can lead to financial shortfalls.
2. Prioritise Expenses
Identify essential expenses and prioritise them. This prioritisation ensures that your critical business needs are met even if you have to cut costs elsewhere.
3. Track Spending
Keep a close eye on your spending. Use accounting software, like Xero or MYOB, or a dedicated bookkeeper to track expenses and identify areas where you can save.
4. Plan for Taxes
Ensure you set aside money for taxes. Regularly review your tax obligations and incorporate them into your budget to avoid any surprises at the end of the financial year.
5. Seek Professional Help
Consider hiring a professional bookkeeper to help you create and manage your budget. A bookkeeper can provide valuable insights, help you stay compliant with tax regulations, and ensure your budget aligns with your business goals.
6. Adjust as Needed
Be flexible and ready to adjust your budget as needed. Business conditions change, and your budget should reflect these changes to remain effective.
Budgeting is a critical component of successful business management. By understanding its importance and following a structured approach, you can create a budget that helps you manage your finances and drives your business towards growth and sustainability. If you need assistance with budgeting for your small business in New Zealand, consider reaching out to a professional bookkeeper who can provide expert guidance and support. Your business's financial health is worth the investment.
If you are interested in investing in your business’s financial health, feel free to get in touch and book your FREE discovery call with me, Samantha!