The two most important figures in any business are “how much have I sold?” and “how much have I spent?”

Every business person we’ve ever had the pleasure of working with almost always has a more certain idea about the latter than the former. It’s always much harder to predict incomings than outgoings in every company.

With that in mind, budgeting offers lots of different advantages. In more plentiful times, assuming you stick to a tight budget, there’s more cash in the business. In leaner times, particularly for seasonal businesses where you may spend half of the year making losses, budgeting gives your company extra breathing room when you need it.

Let’s look at the Panthera guide on how to budget for your business.

Business budgeting – the three types of costs businesses face

There are three types of cost every company has to pay – “fixed” costs, “variable” costs, and “exceptional” costs.

Fixed costs describe those types of expenses that don’t change no matter how much you sell during a month.

They include:

• rent (or commercial mortgage payment if your company owns its premises),

• business rates, utilities (gas, water, electricity),

• telecoms and internet infrastructure,

• any software licences you own,

• any leases on vehicles or equipment, and, of course,

• standard salaries.

Variable costs are those expenses which do change according to how well your business is doing. For example, if you’re selling more in a month, these are the effects on your variable costs:

• you’ll buy more direct materials,

• you’ll pay the courier company more if you deliver by post,

• your credit and debit card charges will be higher,

• you may have to employ staff to work more hours than normal

• pay commissions based upon sales,

• higher volume-based licensing fees

Exceptional costs are those costs which you can not foresee and which are difficult to make provision for. This might be a bill from a solicitor if you need to threaten legal action or someone is threatening legal action against you. If you occupy leased premises and your landlord makes material improvements to the building not covered by the sinking fund, you may get a substantial bill to contribute towards those improvements.

Business budgeting – how can you budget your fixed costs?

The first thing to look for on your business account are direct debits and standing orders for services you no longer use. Because running a company is hectic and demanding, sometimes old direct debits can be left collecting money from your account for months and years as owners forget to cancel them.

Next, look at the contracts you’re actually in. Do you need the offices or premises of the size you have now? Can you transfer to a newer and cheaper location? If you can, this will get both your rent and your rate bills lowers. Do you need all the software you’re paying a monthly licence for? If you can see a legal way to leave a contract that you’re in where you are no longer convinced that what you’re being supplied with is necessary, cut it adrift.

A company’s largest ongoing bill is normally the salaries it pays its employees. Does every member of staff pay his or her way? Are there some things that staff do that can be outsourced for a much cheaper rate?

Go through every fixed outgoing and, if you can ditch that fixed cost without breaking a contract or you can switch to a cheaper supplier, do it.

Business budgeting – how can you budget your variable costs?

Variable costs offer potential savings too.

The commission you pay your sales staff is one area to look at. Can you restructure their package so that they get a lower percentage in commission up to one level of performance and a higher percentage past a point where your company makes more money than it does now?

If you carry stock, there are ways to preserve your cash. The inventory turnover ratio is a measure of how quickly it takes to sell out your stock.

Let’s say that you turn over £500,000 a year and, at any given time, you have £70,000 worth of stock in the business. Divide £500,000 by £70,000, then take the figure you’re left with and divide it into 1. Take this sum and multiply by 365.

£500,000 divided by £70,000 is 7.142. Divide that into 1 – 1 / 7.142 and that gets you 0.14. Multiply that by 365 and you get 51.1. This means that it takes your business, on average, 51 days to sell its entire stock.

Do you need this much stock? By reducing your stock level by 50%, your business will carry £35,000 more cash in it at any given time than it has at the moment.

In addition to looking at stocking levels, are there alternative suppliers offering you a cheaper price where you will have the same or a greater level of confidence in getting the same levels of service you have now? Further opportunities to budget may exist by shopping around.

Business budgeting – budgeting for the financial stress points all companies face

Better budgeting will allow you to better ride out the stress points all businesses face.

On any given month, you’ll have a large payment to make in PAYE to HMRC on the 22^nd of each month followed by the wages a week or so later.

Every quarter, in just under three weeks, your business faces major cash calls with PAYE on the 22^nd, quarter rental day on the 25^th, wages soon after, business rates on the 1^st of the month and VAT on the 7^th.

Business budgeting – how can Panthera help?

Our team are always on hand to help with all your business issues, including budgeting. In the last 24 months, We’ve worked with dozens of clients who wanted our assistance to get a better grip on their money.

We’ve also just started working with Spotlight Reporting. They’re going to provide an even deeper level of analysis to businesses like yours through intuitive dashboards, reporting, and forecasting.

Want to talk with us about any issues raised in this article? Please get in touch with the team on 01235 768 561 or email enquiries@pantheraaccounting.co.uk.