Budgeting is a swear word for some; however, having a good budget, and understanding it, means a business can make much better financial decisions.
There are two main techniques, and you need to decide which works best for you.
Firstly, enter your income and expenditure from previous years into a spreadsheet.
Begin to split your costs into 2 categories: ‘Variable’ costs are ones which depend on how your business operations and spending decisions fluctuate over time – for example, if you decide to hire a consultant, or upgrade your equipment, these are variable costs.
Meanwhile, ‘Fixed’ costs will be incurred even if you do no work and your circumstances don’t alter; for example, office rent would be considered a fixed cost.
1. Contribution
Simply the amount of money that is left over from the sale, after paying the ‘variable’ cost, to pay the fixed costs and the profit.
For example; imagine you make teddy bears, selling them for £50, with each one costing you £35 to make; this gives you a ‘contribution’ of £15 from the sale of each bear, to cover your fixed costs. So, if your fixed costs are £10,000 a year, you need to sell 667 bears to cover your costs.
2. Overhead Absorption Rate
Use the ‘fixed costs’ to calculate an hourly rate.
If your fixed costs are £10,000 and you work in your consultancy business for 20 chargeable hours a week, with 4 weeks of no work, this equals 960 hours a year. Therefore, you need to add £10.42 per hour to every quote you give, in order to cover the fixed costs (i.e. £10,000/960 hours) This brief article introduces you to the benefits of budgeting and how they can help your business in a practical and useful way.
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