How to Use the Xero Budget Manager for Your Small Business

A friend who is senior director of strategic planning for a Japanese pharmaceuticals company recently said to me, "No serious company operates without a budget". At the time I did not have a budget for Menadena. Menadena's primary business is web design and business consulting but as a sole proprietor I had yet to see the need for a budget.

My friend's comment changed that. I decided it was time to develop a budget, and that is when I discovered the Budget Manager in Xero, my online accounting software

Prior to using Xero Budget Manager, the financial key performance indicators (KPIs) in my strategic plan were all income goals. With little additional effort, Budget Manager allows me to not only track income forecasts, but also expenses and profit so that I can achieve my performance goals. 

xero budget manager

Create a Budget

Budgets are how businesses track income and expenses throughout the year. Budget Manager uses the chart of accounts for my company and I used these fields to make estimates for the Menadena budget. 

Income

Menadena has several sources of income that fall into three categories, Sales, Services, and Acting. The primary source of income, however, is Services. The financial KPIs in the Menadena strategic plan are income goals for web design and business consulting.

Budget Manager allows for forecasts of 3, 6, 12, and 24 months, and I chose to enter my monthly income goals for Services over the next 12 months. With Apply Formula, I was able to choose a fixed monthly amount or adjust the amount each month, like adding a 10% monthly increase. 

Expenses

Menadena's operating expenses fall into several large categories like Rent, Insurance, Travel, Advertising, Office, Fees, and Taxes. One feature of budget manager that is helpful in forecasting expenses is that it makes it easy to see what expenses were in previous months. This allows me to make estimates based on actual numbers without having to refer to other reports. 

The Apply Formula feature can also be used for expenses. This is helpful for expenses like advertising which I estimate as a percentage of income. So if I forecast a 10% increase in income, I can use a similar percent change for advertising expense. 

xero budget manager apply formula

Additional Budgets

One feature that I am not using right now is additional budgets but I can see how these would be extremely useful for certain types of businesses. As the treasurer of a non-profit, for example, we had several fundraisers throughout the year and would track these expenses to determine how much the event cost versus the amount of money we raised. Additional budgets in Budget Manager would be a great way to do this. 

Track Your Budget

Once the budget is set up in Budget Manager, Xero provides several reports for budget tracking. These budget reports include:

  • Budget Variance
  • Budget Summary
xero budget reports

Budget Variance

The Budget Variance report allows me to see actual performance versus my budget over time. By looking at the current month and year-to-date, I am able to see how well I am doing against my goals and make adjustments as necessary.  

Budget Summary

The Budget Summary report is the budget displayed as a report. While I am not using this right now, again I can see how it would be super useful in a nonprofit organization. The Budget Summary report is an ideal way for an executive director or treasurer to present the annual budget to the board of directors. 

Improve Performance

My friend's admonition inspired me to take action and develop a budget for Menadena. While focusing on income was a great place to start, the budget is the tool I need for financial management of my company.

The Budget Manager in Xero is a powerful, easy-to-use tool that allowed me to take the next step to build my business. 

 
 

Disclosure: My company Menadena has affiliate relationships with many of our service providers including Xero. This means we may earn commissions or other benefits by promoting our affiliates and when readers click on affiliate links and purchase products or services.