Budgeting is a vital aspect of running a smaller company, yet it doesn’t have to be a complicated process. By following a few straightforward steps, businesses can create a practical budget model that helps guide decision-making and ensures financial stability. Here’s a step-by-step approach to building a simple budget model.
1. Define the Target
Before starting, it’s essential to establish what you want to achieve with the budget. Common objectives might include:
- Extending runway (for non-profitable businesses)
- Achieving profitability within current cash reserves
- Reducing costs
- Growing revenue
- Increasing profitability
- Modelling debt or investment scenarios
Knowing the target upfront will shape the entire budgeting process.
2. Find a Template
Why reinvent the wheel? Using an existing template can save time and effort, and many templates are designed to suit different business models, from SaaS to e-commerce. Starting with a template means you’re leveraging expertise that has already gone into building something fit for purpose, potentially saving you hours of manual work.
3. Model the Revenue
Revenue modelling should be kept simple, as overly complex models often don’t yield better results. Consider using a net new revenue target (ideal for SaaS businesses) or apply a simple growth percentage to your existing revenue base.
Questions to ask yourself when modelling revenue include:
- How much has the business grown month-on-month so far?
- What did it cost to acquire each customer or sale?
- Can you increase marketing or sales spend based on current knowledge of lead generation channels?
- How much additional spend can the business afford?
Keeping things straightforward will make it easier to track and forecast future growth.
4. Input Your Costs
Start by listing all fixed costs, including salaries, rent, insurance, and leases. Then move on to variable costs, which may depend on factors such as full-time employees (FTEs) or revenue (cost of goods sold or CoGS). These could include subscriptions, marketing expenses, and financial costs. Many budgeting models handle this process efficiently.
Once you’ve accounted for costs, you’ll have a basic profit and loss (P&L) statement and can proceed to cash flow.
5. Cash Balance from the Previous Month
Use your cash balance at the end of the last month as the starting figure for the first month you’re modelling. This is a critical input for tracking cash flow throughout the budget period.
6. Receivables and Payables
Ensure you include all receivables and payables in the model. This step is usually straightforward if your bookkeeping is up to date. It’s important to maintain accuracy here to avoid cash flow surprises down the line.
7. VAT
If VAT is part of your financial operations, it can be tricky to model if you’re unfamiliar with it. Most budget templates handle VAT calculations automatically, but it’s worth double-checking the inputs and ensuring the model reflects your VAT liabilities accurately.
8. Inventory, Fixed Assets, and Other Complex Items
Managing inventory or fixed assets can complicate budgeting. Seek advice from your network or professionals if needed. It’s worth noting that there are services available that offer assistance with one-time budgeting or financial models, which can simplify these more complex aspects.
9. Investment or Debt
If you’ve secured any investments or loans, or if you’re making debt repayments, these should be reflected in the budget. Make sure to include incoming capital and any scheduled repayments.
10. Other Financial Considerations
Other factors to include might be payroll liabilities, provisions, or other receivables. Be sure to include any smaller line items that could impact cash flow over time.
11. Evaluate the Results
Once all the inputs are complete, assess whether the budget achieves the target you set at the start. Has the runway been extended? Are you on track for profitability? If the desired results aren’t met, review your costs—there are often hidden savings to be found.
Conclusion
Creating a simple budget model doesn’t need to be an overwhelming task. By following these steps and using a solid template, smaller businesses can get a clear financial picture and make more informed decisions. While there are always additional factors to consider, this guide covers most of the essentials for building a reliable budget model. Remember, the key is to focus on clarity and simplicity, ensuring the model aligns with the business’s goals.
