Simple Steps to Create a Business Budget

Guide for Create Your Business Budget

     Business owners know how important a business budget is when it comes to managing expenses and planning for the future of their business, and in a challenging economic environment like the one we live in, your business budget is even more important.

With inflation and the possibility of a recession, business owners need to be able to forecast cash flow, manage expenses, and plan for the future. Making a detailed business budget is the first step.Whether you're looking to change your budgeting method, or you've never created a business budget before, this article on creating a business budget will walk you through the process.

What is a Business Budget?

A budget is a detailed plan that describes where you will spend your money each month or yearly.
You give every penny a "task," based on what you think are the most important uses of your business funds, and then compare your plans to reality to see if your budget fits with the plans.
Budgets will help you:
- Estimate how much revenue you expect to earn
- Plan where to spend the earnings
- See the difference between your budget plan and reality

Estimate Your Income
Many businesses have failed by overstating revenue and borrowing more cash to meet operational needs. It defeats the main purpose of budgeting. When finding income, ensure to calculate for revenue, not profit. Your revenue is all the money that went into the business before expenses were deducted.
To keep things realistic, it's a good idea to analyze previously recorded revenues. Businesses should regularly track revenue on a monthly, quarterly and yearly basis.
Your previous year's income figure can be used as a reference point for the next time.
It is necessary to rely on this empirical data. This will help you set realistic goals for your business, which will ultimately lead to your business growth.

Cost Analysis
Before you start preparing a budget, you should research the operational costs of your business. Knowing your costs gives you the foundational knowledge to develop an effective spending plan.
If you draw up a rough budget and find that you need more funding for your business activities, it will jeopardize your goals.
Your budget should account for fixed, variable, one-time, and incidental expenses.
Some examples of fixed costs are rent, salaries, accounting services and insurance. Examples of variable costs include cost of goods sold and labor commissions.

There's nothing wrong with overstating your budget, since you'll need enough cash to handle your future expenses.
If your business is new, then you will also have to factor in start-up costs. Planning a budget in this way can help you make an informed decision, and deal with unwanted financial surprises.

Create Your Profit and Loss Reports

Once you've gathered all of the above information, it's time to combine it all to create a profit and loss report. (nerdwallet.com)

Talking about profit and loss can indeed cause feelings of anxiety. It's a matter of adding and subtracting: Add up your income for the month and total your expenses for the month. Then, subtract your expenses from your income and hope you get a positive number at the end.

If positive, you are in profit! If not, that's a loss - and that's okay. Business is sometimes unprofitable every month, let alone every year. This is especially when you are just starting a business.

Types of Budgets for Business

Budgets help companies track and manage their resources. Budgets are used to measure expenses and develop effective strategies to maximize assets and revenues. The following budget types are commonly used by businesses:

Master budget

Master budgets are a collection of individual company budgets designed to present a complete picture of its activities and financial health. Master budgets incorporate factors such as operating expenses, sales, assets and revenue streams to allow companies to set goals and evaluate their overall performance, as well as individual cost centers within the organization.

Master budgets are commonly used in large companies to keep all the individual managers in sync.

Operating budget

An operating budget is an estimate and analysis of projected revenues and expenses over a certain period of time.

To create an accurate picture, the operating budget must take into account factors such as production costs, labor costs, materials costs, manufacturing costs, and administrative costs.

Operational budgets can be prepared on a weekly, monthly or annual basis, depending on needs.

The business owner or manager can compare these reports month by month to see if the company is spending too much on inventory.

Financial budget

A financial budget presents a company's strategy for managing its assets, cash flow, revenue and expenses. The financial budget is used to establish a picture of a company's financial health, and provide an overall picture of its expenditures relative to the income from company operations.

Cash flow budget

A cash flow budget is a tool for projecting how and when money will enter and leave a business over a specified period of time. The cash flow budget is useful in determining whether a company is managing its cash wisely.

A cash flow budget considers factors such as payables and receivables to assess whether a company has enough cash to continue operating, how to use cash productively, and the likelihood of generating cash in the near future.

Static budget

Static budgets are fixed budgets that remain unchanged regardless of changes in factors such as sales volume or revenue.

Last Words

Budgeting is a fairly easy, but extremely important process that business owners use to estimate (and match) current and future income with expenses. The goal is to ensure that enough cash is available to keep the business running, to compete, to grow the business, and to ensure a solid emergency fund.