How to Create a Small Business Budget using Xero

Whether you are setting up a new business or looking to grow an existing operation, a financial plan for the company is essential if it is to avoid joining the 50% of UK startups that fail in the first three years.

Understanding how growth will affect finances is crucial if you are to understand how costs and benefits are impacting on accounts. Demonstrating a knowledge and control of finances will also help if external funding is needed to grow the business. Whilst there is no substitute for the services of a qualified accountant, having the right tools to help you get a grip of your finances is essential.

There is a lot of cloud accounting software out there but one of the best in my opinion is Xero and in this article for Startup Today I want to look at how to create a small business budget using it.

Budget Fundamentals

A knowledge of some accounting fundamentals is essential for the success of any business, especially at the outset. It is important to have a firm grasp of budgeting and how they are impacting on your bottom line.

The first of these is profit and loss. At a glance, this will help you see whether you are making money or losing it. Terms you should understand include:

• Income: The money generated from services or products
• Expenses: The money you are spending for example to cover salaries, marketing and material costs
• Depreciation: Assets you own that lose value over time.
• Overheads: This includes every day running costs including rent and utilities.
• Payroll: Employee salaries including pension payments and taxation
• Debt repayments: Recurring payments on things like loans.

Knowing whether the business will move into profit after the initial trading period is down to good budgeting and business planning.

A second fundamental is the balance sheet, which indicates what you own and what you owe. Assets such as cash in the bank, outstanding invoices, and current assets such as real estate, computers and machinery appear on the plus side of the balance sheet. The negative side will show liabilities such as taxes, loans, debts and expenses.

An overview of the company’s current financial standing can be generated by a trial balance. This will show assets and liabilities as well as debts and credits in one file. At a glance, a budget will allow you to see the state of your company.

Budget Planning

Once you are familiar with the basic terms described above, you can think about planning your budget. By adopting cloud accounting software such as Xero will offers you the functionality to create a budget on a single platform including invoicing, payroll, bank reconciliation and full reporting capabilities. There are two ways to set up a budget in Xero by either creating it manually or importing data.

Manual budget creation:

1. Go to Reports Tab > All Reports > Financial > Budget Manager > Create New Budget.
2. Input your start date, actuals (period prior to start date against which you would like to compare your current budget), and time period (how far forward you want to budget).
3. Click Update.
4. Manually fill out each row.
5. Click on the green arrows beside every cell to change the formula. The pop-out menu will let you apply a fixed amount to each month, adjust the amount each month, or adjust the percentage each month.
6. If you don’t want to have any new effect, put “-“ sign while setting adjustments.
7. Click Apply when done.

Import budget creation:

1. Go to Reports Tab.
2. Click on Import button at the bottom of the page.
3. Click Download Template. You will see a template based upon the start date, actuals, and time period that you selected earlier.
4. Input your details.
5. When done, go back to Input screen > Browse > Find your .csv file > Import.
6. Confirm.
7. Edit as you see fit, using the green arrows to adjust formulas.
8. Click Apply when done.

Note that Xero will round decimals up to the nearest pound if an amount is 50 pence or over, or down to the nearest pound if under 50 pence.

Once you have your data input complete you can generate a number of reports.

Budget Variance Report

This will compare business performance against budget over time, meaning that you can adjust costs if necessary.

1. Reports > All Reports > Budget Variance (financial section).
2. Go to Current Format > Actual vs Overall Budget.
3. You will see 8 columns where you can start deriving your data.
4. If you want to change the layout, click on Layout button at the bottom menu.

Budget Summary Report

Summary reports will give help with presenting your budget to various stakeholders.

1. Reports > All Reports > Budget Summary (financial section).
2. View budgets per category or without category.
3. Select month, period, number of periods.
4. Add a summary of the report if you want by clicking the top left button.

Account Summary Report

Account summary reports will let you view actual and budgeted amounts for your expenses and incomes.

1. Report > All Reports > Account summary (accounting section).
2. Select account, period, and budget to be compared.
3. Analyse your budget based on Xero’s graphs.

Assessing the necessary assumptions will help you to achieve targets and produce a budget which will deliver against those goals through sales and appropriate investment. Xero Cloud Accounting software eases this process, improving company performance and minimising resource wastage through accurate analysis of financial data.

About the Author: Andy Hyland is a certified Xero Accountant and the owner and director of AK Tax, an accountancy and tax advisory firm based in Medway, Kent. You can connect with him on Twitter, Facebook and LinkedIn.