From your point of view, business is great. You’re making sales, retaining customers and even attracting new people to your business. Your brand resonates with your target market, and your products or services cater to their needs with aplomb. Yet, while your revenue is healthy enough, you still struggle with cash flow and profits seem to elude you. But even if you’re bringing in decent revenue, your margins are a much more important indicator of your financial health. And if these are poor despite strong sales, maybe your operating costs are to blame.
If you’re tired of scraping by with razor-thin margins, it’s time to get your operational costs under control. To do this, you need an operating budget that will help you stabilise your cash flow and help you to gradually increase your margins.
Why does my business need an operating budget?
Maintaining harmonious finances in your small business is about more than making money. It’s about keeping as much distance between your top and bottom line as possible. The space between these is where your profit margin comes from. And with business finance, margin is the one metric to rule them all.
Even if your revenue increases, you can’t expect healthy profits if your operating costs are allowed to spiral out of control.
A lack of budgeting also inhibits your visibility of your business finances. Without a clear idea of how much you’re spending and where that money is going, you’re not able to make financial decisions that are informed by complete data.
But with an operating budget, you can take control of your bottom line.
What should I include in my business budget template?
What you include in your operating budget will depend on the nature of your small business. Some business models inherently carry more business expenses than others. Manufacturing companies, for instance, will have different operating costs to a SaaS startup. However, we’ll do our best to cover all possible bases here. The following typically include a combination of fixed and variable costs.
By carefully calculating fixed costs and making informed projections on your variable costs, you’ll be able to put together a solid operating budget that you can measure against your revenue to ascertain the financial health of your small business.
These are the costs that go into producing your product. It is typically expressed in cost per unit. Production budget can also be expressed in terms of the units you need to produce to keep up with demand.
A useful formula to remember is:
Expected unit sales + Period end unit inventory − Period start unit inventory = Required production budget in units
This is your projected sales for a given period. Most businesses project sales from the “bottom up”, meaning that they account for all of their operating expenses then pool data from a variety of sources to project sales revenue.
This can come from historic data, competitors’ sales figures or industry averages.
Direct labour budget
This is the cost of your human resources. It accounts for everyone on your payroll plus any freelancers or casual labourers you hire.
Direct materials budget
This is the cost of the raw materials required to make your products. Or, if you’re a retailer, the wholesale cost of products you order within a given period. The better you know the raw material costs per unit sold, the better positioned you are to establish a reliable production budget.
Overheads are all the other costs you bear to deliver your product or service to the customer. They may contain both fixed and variable costs, such as:
The rent payable for your store / office
Outsourced IT / HR / marketing costs
Consumables such as paper, ink, toner, stationery etc.
How often should I revisit my budget?
Businesses typically revisit their budgets annually. However, as a smaller or newer business, you may want to revisit your budget more regularly. Whenever you make operational changes such as switching to a new supplier or launching a new product line, it’s a good idea to revisit your budget.
We can help
If you’re interested in discovering more about operational budgeting, or any aspect of your small business finances, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.