The start of the new year is a time for fresh beginnings and setting goals for the months ahead. It’s time to hit the reset button and get back on track with your finances. Whether you’re an individual or a business, setting a budget is the first step towards financial success.
Why set a budget?
A budget is your financial best friend, providing a clear roadmap for your money. It gives you a picture of where your money is going and helps you make smart spending decisions. With a budget in hand, you can avoid overspending, prioritize your expenditure, and achieve your financial goals.
Steps for a Business Budget
While it is strongly recommended that you set up a business budget with your accountant, the basic steps of setting up a budget can be carried out by anyone.
1. Look at your income
Where does it come from? When does it come in? Identify your most valuable clients and when you might need to prepare for the seasonal slowdown.
2. Calculate your fixed costs
Fixed costs are the costs that come up regularly and which are essential to running your business. This can be anything from insurance to rent payments. Write them down and then total them.
3. Calculate your variable costs
These are the costs that vary month by month. Non-essential expenses can also be included in this figure, think of the office coffee machine.
4. Create your P&L (Profit and Loss)
It’s often better to work with an accountant on this step, but you can do it yourself too. Add up the revenue coming in for a month, subtract the expenses and what’s left is either profit or loss.
5. Plan
Use the data to make informed plans for your business’s future. Ensure that you are allocating your funds wisely in the year ahead. If you’re in a particularly seasonal business, do the math to ensure that your loss-making months are covered by your profitable months.
6. Keep it updated
Remember to update your budget regularly as new information arises, so your plans stay aligned with your financial situation. Your estimates may change throughout the year as new information comes to light (i.e. the RBA setting a new cash rate), these changes will likely have notable impacts on your budget.
Steps for an Individual Budget
The core aspects of an individual budget are fairly similar to a business budget, although the income and expenses to keep track of will undoubtedly differ. Individual budgets are also thankfully more flexible than business budgets in terms of complexity.
Individual budgets can range from something as simple as allocating funds to specific expenditures (i.e. $100 to be spent on eating out each week) or something a bit more comprehensive. If you’re interested in setting up a detailed and comprehensive budget for the year ahead, Tailored Accounts has built a free Excel spreadsheet to help you manage your household budget and achieve your saving goals.
Simply input your monthly earnings, the cost of monthly repayment for your home, details on your investment properties, as well as other major costs and/or earnings, and you’ll be able to see if your income is sufficient to cover your average expenditure. If not, make adjustments to your spending to balance the books!
Conclusion
A budget is a critical tool for staying on top of your finances. While we recommend that you review and update your budget throughout the year, doing it at the beginning of the year can provide you with a fresh perspective, ensuring that the budget is aligned with your current financial situation and enabling you to make plans for the year ahead.
Source: Tailored Accounts
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