Budgeting: recipes for success

Uncomfortable, restricted, stressed, nervous, limiting, unreliable – these are just some of the words people used when asked how budgeting makes them feel. But budgeting is a vital part of running a successful business and, when done well, doesn’t need to elicit such negative emotions.

Your business budget helps you to check the viability of your business operations, set prices for products and services, plan for how to spend money and formulate contingency plans. If you think about the components that go into a budget rather than being overwhelmed by the concept, this will help to breakdown the budgeting process into digestible chunks. For example, if formulating a pricing strategy, think about your addressable market and then consider your expenses in terms of fixed and variable costs. This will help to determine a pricing strategy for your products or services which will cover the costs of running the business and maintaining a profit margin. Ultimately, a budget should be a useful tool to support your business plan and strategy – and not something to avoid.

As you put together your business plan, you may set yourself a series of KPIs (key performance indicators) to help you track your progress. Your top KPIs will likely be related to finances – and without a budget, you can’t measure how you’re performing against your KPIs and ultimately whether you’re achieving your business goals. A well-constructed budget allows you to track your performance on a monthly basis and assess whether you’re likely to hit your financial KPIs and goals in the year ahead. If you’re not on track, the budget can show you where you’re going wrong and areas which require action in order to get back on track. Always remember the phrase ‘what gets measured, gets done’.

If you approach a bank for funding, they will assess both non-financial and financial factors. Non-financial considerations will cover aspects such as your industry experience, your reasons and opportunity for starting the business, management team supporting the business and your broader business plan / strategy.

When it comes to financial factors, your budget is key. If you’re looking to borrow to purchase machinery or equipment, for example, the bank will assess how your budget would support that purchase and how you will generate the revenue and profitability to service the loan. They will also consider how your budget reflects your business plan, how you will get from one stage to the next, what the financing requirements are at each stage, and whether you have built in contingencies.

When you approach a bank for financing or to open a business account, it’s important to have a view of your credit score. Use tools available online to check your credit score and, if it’s low, to understand the reasons why. You can then take steps to improve your score and give yourself the best chance of success when submitting an application. It’s important that, if you are declined funding, or are refused an account, you always ask the reasons behind the decision. This will help you to go back and address any issues.

When first starting a business, many people tend to use their personal account for making and receiving payments. But, it’s often advisable to try and open a separate business account as soon as possible. This will make it much easier to manage your finances and to track your business expenses. From an accounting perspective, it can also help to keep things straightforward. Otherwise, you might find yourself having to untangle business purchases and the family supermarket shop!

The FCA’s most recent Financial Lives survey found that 28.4 million people, or one in two of those surveyed, were feeling stressed due to the increased cost of living. Building a personal budget isn’t a magic wand for financial challenges but it can help you feel more in control of your finances and prioritise your spending.

It’s never too early to start your personal budget. Remember: ‘you don’t have to be out of control before you get in control’. Setting up a spreadsheet or using an online tool to plot out your monthly incomings and outgoings should be straightforward. The challenging bit is being honest with yourself about what you’re actually spending on a monthly basis. Once you’ve done that, you can see where you might be able to make savings. Honesty also applies to the conversations you have with the people around you. Money can be a taboo subject but talking about it can help you face up to the challenges.

Like a business budget, your personal budget should have goals to help you keep on track. They may be short-term goals such as a holiday, or longer-term goals such as paying off your mortgage. Having those goals in place can help offer some clear direction, and give you something to track your progress against.

There are apps and tools available online that allow you to track and categorise your spending. If you have separate bills and spending accounts, it makes that tracking even easier – but it’s important to keep looking at the data. Go back and keep an eye on how much you’re spending on regular expenses such as the supermarket shop, childcare, or even meals out, so you can understand where you may be able to make savings. People often don’t track their disposable or discretionary spending, but this is where you’re most likely to be able to save money.

Our Financial Health Specialists are experienced personal bankers who are available to speak to you about your banking and financial needs. They’re here to help you achieve your financial goals, whatever they may be. You can discuss any aspect of your finances, plans or goals. Book a visit