What is a budget?
A budget predicts how much money will come and go from your business over a period of time (usually a year). Budgeting and forecasting help startups see if they can afford to start a business – and if it will repay all their hard work with a return on their effort.
The purpose of a budget
Budgets predict the money-making potential of a business, but they also tell you things like:
- how much it will cost to start up
- whether you’ll need to borrow money
- your breakeven point
- what you need to charge customers
- if you can afford staff
How to make a budget
Start off by listing your costs and note roughly when they’ll hit. The timing is important to small business budgeting because it affects your cash flow. Do the same for income.
Budgeting is so nice, you ought to do it twice
Make a budget that assumes a solid first year, and another that assumes a slow start. That second budget won’t be so much fun to create, but you’ll be glad to have it up your sleeve if things don’t take off. Bank managers and investors will also want to see two budgets.
Small business budgeting mistakes to avoid
- Don’t forget to deduct sales and income tax from sales revenue
- Some jobs go wrong, and some inventory gets broken so build in contingencies
- Remember to calculate how much interest you’ll pay on loans
- Factor in costs to insure your business against liabilities and disasters
- Put money aside to cover depreciation of assets like work tools (because you’ll have to replace them eventually)
Creating a financial plan for your business
Try not to freak out about this red part of the graph.
That’s just part of being a startup and will appear in most small business budgets. It will take time for customers to find and trust you, so sales will be slow in the beginning. Meanwhile you’ll have a lot of set-up costs to contend with.
Include a section in your business plan on how you’ll make up the difference. Will you dip into personal savings? pitch investors? go to the bank? or turn to family and friends?
The difference between a budget and a forecast
Budgeting and forecasting are often treated the same, but there are important differences. Small business budgeting shows how you expect the business to perform over a given period. Forecasts use real-life sales and cost data to show where things are actually headed.
For obvious reasons, you want to know if the two are seriously out of whack. So check your budget against actual business numbers regularly. That way you can fix problems before they get too big, and spot opportunities before they’re missed. Plus the exercise will help you get better at estimating costs and income for the years ahead. Small business budgeting and forecasting go hand in hand.
Get help from an accountant or bookkeeper
Accountants and bookkeepers work with small businesses all day, every day. They can help get your numbers right. Find one in the Xero advisor directory.
Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
How to start a business
Thousands of new businesses open every day. If all those people can do it, why not you? Here’s what to do, and when.
- How to do market research
Your business idea is clearly inspired. But it helps to check you’re not the only one who thinks so.
- How to write a business plan
Writing a business plan will help nail down your idea and give you a blueprint for executing it.
- Budgeting and forecasting
It’s time to run some numbers on your business idea. Budgeting and forecasting help with that.
- Pricing strategies and cost of goods sold
Your prices can influence the number of sales you make and the profit you earn on each transaction.
- Types of business structure
Your business structure can affect how much tax you pay, and how you're treated by the law.
- Small business accounting
If you’re starting a business, then you’ll need to get familiar with some accounting basics.
- Registering a business and other admin tasks
After all the excitement of deciding to start a business, you’ll have some paperwork to do.
- How to create a business website
Treat your website like an online version of a storefront. It’s the first impression for many customers and prospects.
- Tools and guides for your business
Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.
Download the guide to starting a business
Learn how to start a business, from ideation to launch. Fill out the form to receive this guide as a PDF.