Budgets

Do you know whether your business is viable?

Do you know what your upcoming expenses are?

When we work for ourselves our income is unpredictable and our expenses are not always regular but can be weekly, monthly, quarterly or annual.  By preparing a budget you can map out your estimated income and expenses for the upcoming year.

What is a Budget?

A budget sets out your estimated income and expenses for a certain period.

In Australia, it is common to prepare a budget for the financial year being July – June.

Business Budget

How to prepare a budget:

You can prepare a budget for your business outlining your expected revenue streams and expected expenses as follows:

1. Set up a column for each month of the financial year July through to June

2. Itemise & total your expected revenue across each month (e.g. Services provided, sale of goods)

3. Itemise & total your expected expenses across each month, allocating them according to whether they are paid weekly/fortnightly/monthly, quarterly or annually.

(Refer last month’s article for examples of common expenses incurred in running a natural therapy business.)

4. Net off your expected revenue – expected expenses = Projected Net Profit

5. Deduct your estimated tax (if known) = Projected Net Profit after tax

Benefits of preparing a budget:

• Will assist you to determine as to whether your business is expected to make a profit in the financial year
• Eliminates any surprises as it will prepare you by identifying any upcoming large expenses
• Enables you to assess whether there are any expenditure items which can be trimmed
• The projected net profit will assist you to estimate your income tax liability

Personal Budget:

As our income can be unpredictable, I find it is beneficial to also prepare a personal budget.  This way you can track your personal commitments as well.

How to prepare your personal budget:

1. Set up a column for each month. (It is beneficial to prepare the budget for a full year as well so as to capture all expenses as some commitments only fall quarterly or annually.)

2. Itemise & total your expected income across each month (e.g. Drawings from business, Investment income.)

3. Itemise & total your expected personal commitments* across each month, allocating them according to whether they are paid weekly/fortnightly/monthly, quarterly or annually.

4. Net off your Expected Income – expected commitments.

*Typical personal commitments include:

• Rent or mortgage payments
• Car expenses
• Home & car insurances
• Utilities
• Groceries
• Medical expenses

Benefits of preparing a personal budget:

• Will let you know as to what your upcoming commitments are
• Will assist you to determine as to whether you are generating sufficient income from both your business and personal sources to cover all your commitments

Conclusion

The preparation of a business and/or personal budget is a valuable planning tool and will give you valuable insight into both your business and personal financial situation.  A combined budget will help you to answer such key questions as:

• Will my expected income from my natural therapy business cover my business expenses?
• Will I need to earn income from another source until I have a sufficient client base to cover all my personal commitments?
• Can I afford to take a holiday this year?

————————————————————————————————————————————————————

Tip: Budgets v Cash Flow Budgets

This article has focused on the preparation of a financial budget which highlights the predicated profitability of the business and is a tool to assist with the calculation of your estimated tax liability.  

This is different to a cash flow budget/forecast which focuses on the projection of movements in the bank account to help you control the cash flow of your business.  

Next month we will look at the preparation of cash flow budgets.

————————————————————————————————————————————————————

Disclaimer: This article is an information guide only. It neither purports or intends to be advice.  Always seek advice from your accountant/tax advisor to ensure that both your business and personal needs are met.