How to create Xero budgets that actually work

However you celebrated the festive season just gone, our guess is that it was probably pretty expensive. So, as we head into 2024, just like you, budgets are on the brain of many small business owners. Of course, the first step to healthier money habits is mastering your cash flow forecast, but once you’ve done that – tackling your Xero budgets is next. 

As you might know, bringing confidence to a chaotic budget is a core part of how we offer bookkeeping help here at Dollars and Sense, and our mission is to ensure all businesses are always in their best financial position. So, if you’re feeling confused and ready to get a handle on things, read on for total cash clarity.

How to set up your Xero budgets

Every successful business owner knows that tracking the pennies means the pounds take care of themselves – but this strategy needs to be crystal clear on paper.

Budgeting income figures with real and projected expenses using a tool like Xero budgets can take the stress out of this, but you’ve got to know what to set up, what to put down and how to optimise it.

A budget is critical in business, because it helps you to plan with confidence. Not only can you go big and spend when you’re in a position to, but you can also reel back and make concessions when cashflow is short, with total foresight over when big bi-annual expenses come in. This means no shock bills!

Here’s how to go about it:

• Firstly, list down all of your income over the past 12 months – and that includes everything, including a separate figure for assets (business property you own, vehicles, equipment and inventory). 
• Next, list down all of your liabilities, like expenses, loans, wages, stakeholder equity and any depreciation figures. This is your balance sheet – it’s your starting point of where things are at right now and an indicator for the year ahead.
• Next, it’s time to take this figure of intel, and set up some schedules to spread out the load into a realistic picture of ingoings and outgoings. When we offer bookkeeping help, we do this through the Xero budgets scheduled date feature, so we can see week-by-week what payables will look like. If you have 7-day or 14-day end of month terms, you’re not going to want to miss this step.
• Business snapshot, a tool within Xero Analytics, shows you cash flow data and business insights for the month ahead. Set a reminder to check this at the start of every month for extra know-how on payment trends, days to pay suppliers, and other things that you may be able to tweak to save even more.
• By now you should know how much you have to deal with in any given month, which is going to be very helpful for your growth aspirations. Implementing a 50/30/20 rule on how you spend surplus can offer discipline and guardrails so that you don’t push the limit.
• The 50-30-20 rule recommends putting 50% of your money toward needs (which includes any debt repayments), 30% toward wants, and 20% toward savings. While it might feel hard at first, habits can form easily with consistency.

Remember, by understanding your critical costs and automating as much as possible, you can set up an emergency fund, prepare for an early retirement, pay off debt or pursue other money goals.

What every budget should have

If there’s one thing we recommend becoming a staple in your Xero budgets, it’s a strong cushion.

So, when it comes to ship-shaping our client budgets with bookkeeping help, we always work to the cardinal rule of underestimating income and overestimating expenses – and to at least three months out. 

A good rule of thumb is to ask yourself: What’s the worst week we’ve had in sales recently? That’s your benchmark. 

The benefit of a good cushion is not only that you have access to surplus cash (by regularly doing better than you had anticipated), but you can actually see where the sticking spots are.

For example, one of our clients found through this exercise that all of their salaries kept falling mid-month, except for the largest three that were at the end of month. Unfortunately, that was also when rents were due, and theoretically – they wouldn’t be able to cover it consistently based on lower income months. 

So, we moved everyone to fortnightly pay runs, freeing up more cash in the kitty when it counted.

The Bootstrap Budget: Costs that startups should avoid

As bonafide budget busters, we know a thing or two about unnecessary costs – especially for startups. Have a look through this top 4 quickfire list and see if any might be weighing your Xero budgets down.

• The subscription sink – Business owners are some of the worst for taking on subscriptions they don’t need, and simply forgetting to cancel them (tech-based startups in particular!). Ongoing subscription costs can be expensive, and more so if you pay by month versus annually. Plus, even with subscriptions that startups actually use, most are paying pro premiums for features they aren’t yet able to get the most out of. So, comb through your list – cancel what you don’t utilise every day, stick to free trials before you hand over any card details, and only add in-product features as-you-go.
• Become fine with the consign – Being realistic about what your startup costs might look like is always a good idea. For example, if you’re renovating or fitting something out, know that it will typically be up to 20% more expensive than originally planned. This is especially true for opening stock – so when it comes to fitting out products, know that consignment is your best friend. You only pay for what you sell, with an agreement to return anything that doesn’t. 
• Exxy accounting – Budgets only work when you have a handle on them, but many startups often overlook the humble bookkeeper for a full-suite accounting service. This not only comes at a higher price tag, but your business structure probably won’t warrant it (especially if you don’t have complicated corporate trust and shareholder requirements). Bookkeeping help from a service like Dollars and Sense means you have access to economical, straightforward advice, tailored specifically to you and your books… sans the big price tag.
• A heavy headcount – While growing your business feels great, bringing on full-time employees comes with a huge financial burden. Not only are there permanent salaries to consider, but leave entitlements and superannuation obligations. Tapping into the gig economy or contractor workforce is a great way to minimise these costs, without foregoing on the support you need. There’s never been a better time to bring on local, knowledgeable workers for short or temporary projects – COVID has massively changed the game in this way.