Ever wanted to be able to track your spending and identify areas for cost savings? Having a business budget is the way to go! A budget is an accounting document that details the expected revenue and expenses of your company over a set period.
According to Forbes, whether you are just starting up or have been running your business for a while, creating the perfect budget is essential. It helps with planning, and allocating resources efficiently, and monitors your cost performance. It also helps in managing your finances so that you have enough money to cover all your expenses while saving, thereby reducing the risk of going bankrupt or running out of cash. Having a good set of books is a must at tax time, but having a detailed and accurate accounting of your business expenses can help reduce the amount of taxes that you pay in the long run.
Creating a business budget doesn’t need to be difficult. This blog post covers everything from why to create one to what goes into creating a great business budget from start to finish.
Key points to keep in mind when starting a business budget
- Have a positive attitude to budgeting
- Know your organization
- Build a budgeting team
- Be realistic
- Be conservative
Why You Should Create a Business Budget
There are different types of budgets. You can create a one-off, monthly, quarterly, annual, or a cash-flow-based budget. The choice is yours, and whatever type of budget you decide to use will be an incredibly useful tool for your small business. Budgets help you to make better financial decisions, and most importantly, get a better handle on your finances, giving you a better idea of whether or not your business is headed in the right direction.
Creating a Monthly Budget
A monthly budget will give you a breakdown of your anticipated costs and incomes for each month of the year. It will also allow you to forecast your expenses over the course of the year and compare them against your current cash flow. A monthly budget allows you to plan for upcoming expenses, know how much you can realistically spend on certain items, and not overspend. It will also allow you to identify income and expense items that happen on a monthly basis, such as insurance premiums and utility bills.
You can break down your monthly budget by month, quarter, or even year if you prefer. If you break it down by month, it will give you a better idea of what your finances will look like for each month of the year. Breaking it down by quarter or year will give you a high-level look at your expected income and expenses for each period.
Creating an Annual Budget
An annual budget will give you a breakdown of your anticipated costs and incomes for the entire year as well as a look back at your previous year’s financials. An annual budget allows you to plan for upcoming expenses and know what they will be each year. You can break it down by month, quarter, or even year if you prefer. You can also track your previous year’s data to see what the differences are between your budget and your actual financials.
Creating a Cash-flow-Based Budget
A cash-flow-based budget will account for every cash that enters and exits your business. Where other budgets may account for money to be received and income targets to be reached, a cash-flow-based budget accounts for cash only in the period that it is to be spent/received. The biggest benefit of this budget is that it allows you to know when and where cash will be needed in advance and allows you to plan for it. It will also allow you to track your income and expenses over time to determine where adjustments can be made, breaking them down by category and determining where adjustments can be made. It will account for income from all sources and all expenses, including those that occur once, for example, one-off project-based income.
Budgeting Software
Essential tools to help facilitate effective budgeting include:
- PlanningMaestro by Centage: This cloud-based budgeting software solution has forecasting capabilities to support small and medium-sized business
- Quickbooks: This software is very easy to use and highly affordable. It can be used to track expenses, manage cash flow & create invoices
- Budgyt: This user-friendly budgeting tool supports multiple profit and loss statements
- Audeo’s free Operational Budgeting Template
These softwares help with budget preparation, evaluating the organization’s performance, and obtaining financing. With all the above in mind, you may implement these 5 essential steps to creating a business budget as explained below:
The 5 Steps to Creating a Good Business Budget
Step 1: Analyze your costs
You need to do some study on your company’s running expenses. Having a solid understanding of your expenses provides you with the foundational knowledge required to create a spending strategy. You should account for all costs, including fixed, variable, one-time, and unforeseen expenses. mortgages, salaries, rent, internet, and insurance are a few examples of fixed expenses. The cost of products sold and commissions for labor are two instances of variable expenses. Assigning a value to your product offerings too is also very important. For example, a car repair service = #1000. This step is essential because it will determine how much you record for each service. If you skip this step, you could end up with a large discrepancy between your actual financials and your budgeted financials.
Step 2: Record All Your Income
The next step in creating a business budget is to record all your income. This can be done on a monthly or annual basis, depending on which type of budget you are creating. This step will let you see if you are bringing in as much income as you would like, and give you an idea of how much money you can expect. You can also track income from all sources, including those that occur once, such as a one-off project. You can record your income in whatever format you prefer. Many people choose to record their income on a spreadsheet or in a simple list format.
Step 3: Record All Your Outgoing Costs
The third step in creating a business budget is to record all your outgoing costs. This can be done on a monthly or annual basis, depending on which type of budget you are creating. This step will let you know how much money you are spending each month and on what, as well as give you an idea of what you can expect to spend on various recurring expenses throughout the year. It will also help you to determine where adjustments can be made to reduce spending. You can record expenses in whatever format you prefer. In many cases, expenses are recorded in a spreadsheet or in a simple list.
Step 4: Determine The Difference Between your Current COGS and your Actual Cash-in Receipts
The fourth step in creating a business budget is to determine the difference between your current COGS and your actual cash-in receipts. This can be done on a monthly or annual basis, depending on which type of budget you are creating. This step is important because it will help you to identify areas where you are spending too much money. For example, if you are spending #500 per month on office supplies and #500 is your monthly COGS, then you are spending too much on office supplies. This step will also help you to identify areas where you are not spending enough money, such as marketing expenses. You can expect a certain percentage of your total expenses to go toward marketing. If you are not spending anything or very little on marketing, then you are missing out on a significant source of additional income.
Step 5: Track Your Previous Month/Year’s Data For Changes Over Time
The fifth and final step in creating a business budget is to track your previous time’s data for changes over time. This can be done on a monthly or annual basis, depending on which type of budget you are creating. This step is important because it will allow you to track changes over time: For example, if you create a budget for the month of May, you will be able to track the changes in your financials over the course of the month. You can then use this data to determine if you need to make any adjustments to your budget. If you create a monthly budget, you can track changes in your financials from month to month. This will allow you to see if adjustments need to be made to your budget or if your budget is accurate.
Conclusion
To ensure that your business succeeds, you have to have a clear budgeting plan. Creating a business budget is an essential part of any business plan and will help you see where your money is going and whether or not you have enough money coming in to cover your expenses. A budget is also an essential tool for small businesses because it helps manage cash flow and keep operational costs under control. By creating your own budget as an individual or business owner, you can ensure that all of your financial affairs are in order, reducing the risk of personal bankruptcy in the future. See the previous blog for a detailed guide on updating your business plan and also, contact Audeo for business budgeting and financial planning.