What is a business budget?
Are you tired of feeling like you’re just throwing spaghetti at the wall, hoping that something sticks when it comes to your business finances? Do you find yourself constantly checking your bank account, hoping for a positive balance? Having an effective budget is like having a secret weapon in your business arsenal, and the one thing that will help you stay the course and keep the doors open. Let’s dive in.
A business budget is a financial plan that outlines the expected income and expenses of a company over a specific period, usually a year. It can serve as a roadmap for the company’s financial activities and helps the management team to make informed decisions. A well-prepared budget takes into account the expected sales revenue, operating costs, capital expenditures, and other expenses that the company may incur during the specific period covered by the budget. The primary goal of a business budget is to ensure that your company’s financial resources are used efficiently and effectively to achieve your objectives and goals. It is an essential tool for anyone who wants to have a clear understanding of their company’s financial performance in order to make informed and practical decisions about future investments and expenditures.
What makes a good budget?
Not all budgets are created equal, and if you are going to go to the time and expense of putting together a business budget, it pays to do so effectively. A good business budget accurately reflects the current financial position as well as the future goals of your company. It should be realistic and achievable, taking into account past performance, market trends, and other external factors that may impact operations.
A successful budget should also be flexible enough to accommodate changes in the business environment and allow for adjustments as necessary. It should also be as detailed and comprehensive as possible, including all anticipated expenses, revenue streams, and sources of funding. It should be based on accurate and up-to-date financial information, and the assumptions and projections should be supported by sound reasoning and research. Effective communication is also essential to ensure that all stakeholders such as investors and top management understand the budget and are committed to its implementation.
Different types of budgets
As a growing business, having a budget is essential for keeping your finances in check and ensuring your business stays profitable. However, there isn’t a one-size-fits-all approach to budgeting, and the type of budget you choose will depend on your business needs, goals, and priorities. Here are some of the most common types of budgets:
- Operating budget: This type of budget is focused on the day-to-day expenses and income of a business. It includes revenues and expenses from your main business activities and operational costs such as rent, utilities, salaries, and inventory.
- Capital budget: Capital budgets are used to plan for long-term investments in fixed assets such as property, equipment, and facilities. This type of budget is typically used for large investments that require significant financial resources and have a long-term impact on the company.
- Cash flow budget: A cash flow budget is used to forecast future cash inflows and outflows. This is critical for managing your company’s cash resources, ensuring that there is enough cash available to cover expenses or dry spells.
- Master budget: This is a comprehensive plan that includes all of the other budgets mentioned above. It serves as a roadmap for the company’s financial activities and helps to ensure that all budgets are working together to achieve the company’s overall financial objectives.
- Sales budget: A sales budget is a forecast of the expected sales revenue for a specific period. A sales budget is critical for planning production and inventory levels, as well as estimating the resources required to meet your sales targets.
How do you prepare for a business budget?
Where to start? All the moving parts can be intimidating, but with good planning and some basic groundwork, getting an accurate and effective budget together shouldn’t be too daunting. As always – if you feel out of your depth, it pays to get in the financial experts.
In the meantime, we’ve outlined five key steps that will make the process easier.
- Set financial goals: Before you start creating your budget, it’s essential to set clear financial goals for your business. Determine your revenue targets, cost reduction goals, and other key performance indicators that will help you measure your success. Once you have your goals in mind, you can create a budget that aligns with them.
- Track your income: The first step in creating a budget is to track your income. This includes any money you earn from sales, investments, or other sources. Make sure to categorize your income by source so that you can identify areas of strength and weakness.
- Categorize expenses: Next, categorize your expenses into groups such as rent, utilities, payroll, marketing, and supplies. This will help you understand where your money is going and identify areas where you can cut costs.
- Create a budget template: Once you have a clear picture of your income and expenses, it’s time to create a budget template. This can be as simple as a spreadsheet that lists your income and expenses for each month of the year. Make sure to include columns for actual spending and budgeted amounts. Talk to the team at OCFO about the software packages that we use, with built-in automation and templates that will make this process easy.
- Review and adjust: Finally, review your budget regularly and make adjustments as needed. This includes tracking your actual spending against your budgeted amounts, identifying areas where you overspend or underspend, and making changes to your budget as your business evolves.
Your business budget is a financial roadmap for your business. In other words, it shows where you want to go during the upcoming fiscal year—and how to get there. Without it, it’s hard to measure success. Implementing and adhering to a budget is an important step in ensuring that your business is growing in the right direction.
If you are creating a business budget to help you manage your cash more effectively, make sure that you hit these markers and include the following items.
- Sales revenue: This is the amount of money that the company expects to generate from the sale of products or services.
- Operating expenses: These are the expenses associated with running the day-to-day operations of the business, such as rent, utilities, salaries, and marketing expenses.
- Cost of goods sold (COGS): This is the cost of producing or acquiring the products or services that the company sells.
- Capital expenditures: These are long-term investments in fixed assets such as property, equipment, and facilities.
- Taxes: This includes any taxes that the company is required to pay, such as income tax or sales tax.
- Interest and debt repayments: This includes any interest payments on loans or other debt, as well as any repayments of principal.
- Cash reserves: This is the amount of cash that the company wants to hold in reserve to cover unexpected expenses or to take advantage of opportunities.
- Contingency funds: These are funds set aside for unexpected expenses or emergencies.
If you need assistance with your budgeting, and accounting services, contact OCFO and learn about our remote accounting services and available packages. Our team can assist with your initial cash flow planning and management, and make sure that your business is set up for profitability. Find out more about our business budgeting service and contact us today.