As a business owner, staying within budget is essential for success and sustainability. Yet, many owners overlook critical expenses that can wreak havoc on their financial health.
A well-planned small business budget will:
- show you how many sales you need to cover costs,
- figure out how much money you can reinvest in the business,
- find out when you can afford to hire help.
The real advantage of setting a budget is that it helps you make strategic business decisions. Explore all the benefits of a business budget in our previous article.
Your budget should factor in fixed, variable, one-time, and unexpected costs. Some examples are rent, mortgages, salaries, internet, accounting services, and insurance.
However, it is not uncommon for certain things to fall through the cracks when a business budget is built.
Setting a budget is part of becoming financially literate, a vital skill. The better you can ‘read’ the figures relating to your business, the more successful you’ll be, and you don’t need to be an accountant to do it.
Are the following items on your small business budget?
1. Loan Repayments
Loans are a common source of capital for small businesses. Whether you applied for a bank loan, tapped into a line of credit, or received financial assistance from a friend, loan repayments are a major commitment. However, it’s surely easy for business owners to underestimate the impact of loan repayments on their budget.
To manage this, start by creating a detailed repayment schedule and factoring it into your monthly expenses. This will help you stay on top of your payments and avoid surprises. Additionally, consider refinancing options if interest rates change or your business’s situation improves.
2. Tax Obligations
Tax is a constant presence in any business owner’s life, and it can be tricky to navigate without proper planning. One common mistake is failing to account for taxes beyond the usual income tax.
Depending on your business activity, you may need to deal with GST (Goods and Services Tax), payroll tax, and other state-specific levies. These can add up quickly and become a significant financial burden if not incorporated into your budget.
Work with an accountant or tax professional to avoid this pitfall to ensure all your tax obligations. Spending a portion of your income regularly can help prevent last-minute scrambling when tax season arrives.
3. Insurance Costs
Insurance is another expense that’s estimated. Small business owners often overlook various types of insurance coverage they need, such as public liability insurance, workers’ compensation insurance, or business interruption insurance. Failure to account for these, even at a basic level of cover, can result in financial turmoil in the event of unforeseen events.
Conduct a comprehensive risk assessment for your business to tackle this issue and determine the appropriate insurance coverage. Please don’t skip over to save a few dollars in the short term; it could lead to devastating losses later.
4. Annual Payments
Annual payments can be sneaky budget busters. Many businesses don’t account for expenses that come around just once a year. Depending on your type of business, you may have to pay license renewals, domain name fees, or membership fees. These infrequent costs can catch you off guard and disrupt your financial planning.
To manage annual payments effectively, create a separate account or savings fund for these expenses. Setting aside a portion of your monthly income in this account will help you cover these costs without straining your budget.
5. Maintenance and Repairs
Over time, your business assets and equipment will require maintenance and occasional repairs. While these expenses aren’t as predictable as monthly bills, they should be incorporated into your budget. Neglecting maintenance can lead to higher repair costs and, in some cases, complete asset replacement.
To address this, set up a dedicated maintenance and repair fund. Regularly assess your equipment and assets for signs of wear and tear and allocate funds for upkeep accordingly. This proactive approach can prevent sudden, costly breakdowns.
6. Unforeseen Emergencies
Small business owners often fail to allocate funds for unforeseen emergencies or economic downturns. An unexpected event, such as a pandemic or a natural disaster, can severely impact your business’s health if you’re unaware.
Consider building an emergency fund to guard against unforeseen emergencies. Setting aside three to six months of operating expenses can provide a financial safety net in a crisis. This can protect your business for some time and even cover business operations.
Learn from other’s mistakes
Budgeting for a small business in Australia isn’t just tracking daily expenses; it’s about planning for the future and preparing for the unexpected.
By acknowledging these often-overlooked budget items and incorporating them into your financial planning, you can protect your small business from unnecessary financial stress and setbacks.
Consider accounting software if you want a quicker and less error-prone way to build a small business budget. When set up right, an accounting system will automatically record all your income and expenditures, so you don’t have to gather the information manually.
It might be difficult for small businesses to make annual estimations as the initial growth stage is often volatile. In such cases, you can create smaller budget estimates (say for three months) and keep reviewing them for better results.
Staying money-smart requires vigilance and foresight. Take the time to review your budget regularly and consult with business professionals for financial advice.
A bookkeeper or accountant can double-check the numbers and help you make realistic predictions about business growth, upcoming expenses, and tax exposure.
We covered loan repayments and taxes, insurance and annual payments. Lift Accounting can also advise you on what to do if the actual numbers deviate from the predicted ones.
Always be prepared for what lies ahead. Contact us at (02) 4344 2460 or email us at office@liftaccounting.au
