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FINANCIAL LITERACY •  4 MARCH 2021 • 4 MIN READ

How to set a budget

a birdeye view a woman working on her laptop in a cafe

We’ve written before about what a budget is.  This article provides a guide on setting a budget and understanding the drivers of your business.

Where to start – budgeting your income

Sales

Usually, income in a business is based on a quantity. For example, income for a fruit and vege shop might be the quantity of produce sold. Revenue for a design agency might be the quantity of hours billed. When budgeting your revenue think about what is driving that figure. It is a good idea to break your revenue predictions down into their building blocks of number of items sold, because that gives you a clearer target to measure, rather than just total dollars per month. Remember to think about things like seasonality (when you will sell more or less in the year), holidays, annual closedowns and such. If you’re going to budget for an increase in revenue you’ll also need to think about what effect that will have on your costs. Will you need to pay staff more hours to get more sales? Or will you need to purchase more stock to sell, to increase your sales?

Other income

Think about any grants or subsidies you might be able to apply for. You’ll also want to include in this section any interest income if you have cash on deposit, or other income streams such as subletting office space or honorariums.

What’s next – budgeting your costs

Direct costs

Direct costs are those which are directly linked to each item (or hour of time) you sell. These costs are either fixed, such as the cost of freight to import a container of product, and those that are variable, such as the cost to purchase each individual item you sell. 

If you’ve looked at an increase in your sales, then you need to consider the increase that will make to your variable costs. Fixed costs usually are fixed at a level (so until you fill that container completely with product) and then jump up (to having to pay the cost of importing 2 containers).

Overheads

Finally, let’s cover overheads. Overheads are those costs which don’t directly relate to each unit of sales, such as the electricity cost of running your premises, rent for your building, or subscription costs for industry memberships. Generally, most if not all of a business’ overheads are fixed. That’s because they don’t usually change much depending on how many units you sell. 

Tax

In a company, tax is charged at 28% of your net profit. When preparing a budget it is good practice to include this in each month as a final expense. Perhaps some months in your budget show a loss – then you could budget your tax that month as a positive figure. Because this isn’t reflective of actual cashflow you can also just include it as a total of the year in the final month of your budget if that is clearer for you. It is important though that tax is included as part of your budget as it is a cost to your business.

Accountants are the best at actively working to make sure you’re not paying any more tax than you need to. So, often what you would budget in tax would be different to what you would end up paying once our team has completed their work.

Other items – buying assets and paying back loans

It is important to remember that a budget is only looking at the income and expenses for your business. Items such as asset purchases and loan repayments don’t get included. If you want to get a clear picture of your total business cashflow then you’ll need to prepare a cashflow forecast.

Once you’ve figured out your annual budget, you can divide each line by the number of month’s you’ve set it for to get average monthly figures. Or, if you know the pattern of income or expenses you can put this in (for example if your income follows a seasonal trend). You can also add in one-off annual expenses if you know them, such as insurance to the month in which you expect to pay. Don’t forget, budgets are GST exclusive so any figures you enter need to be without GST.

Finally – review

Take a step back and look at this as a full picture. Does it make sense and look like how your business operates? Is there anything that looks glaringly wrong? This is the time to assess if your picture on paper actually reflects reality.

If you need another set of eyes, or just want someone to work through setting a budget with you, get in touch with our friendly support team.

Who are Beany? 

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world. ​

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.

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Jess Heslop

Jess Heslop

Chief Product Officer

I'm the CPO of Beany where my job is to help craft the best software for our clients and accountants. I'm an ex-big 4 CA and a technology enthusiast, based in Nelson where I live with my husband and two young children.

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