Everything You Need to Know About Creating a Business Budget
Posted on 17th June 2016 in Forecasting
Written by Ross MacLeod
Effective budgeting is essential to ensure that costs are managed and that the business remains on course to achieve its roadmap for success.
Creating a realistic business budget is an effective way to help keep your business profitable. Think of your budget as a roadmap for your business — it provides an overview of what you will be spending and making over a future time period.
A proper budget will include a revenue forecast (educated estimates as to what you will make), a precise plan for your spending (your estimated total costs), and expected profits (the bigger the profit margin, the better).
What does this mean?
Revenues refer to how much total money your business brings in from all sources, including your salary, product sales, investment income, loans and savings.
Total costs are what it costs your business to generate your sales. These include fixed costs (like rent), variable costs (like raw materials and travel), and one-off spends (like computers).
Profits are what you are left with once you subtract your total costs from your revenues.
Following your budget successfully can ensure your business is profitable and achieves its goals.
What to bear in mind when creating a business budget
A budget will outline your estimated income, and then include a plan for expenses. A surplus means income exceeds expenses, and a deficit means expenses exceed income. Since profit is the goal of business, your budget should always strive to be in a surplus state. The alternative can lead to financial losses, increases in debt, and the potential closure of your business.
A budget is a rough guide for your annual business expenditure. For example, if midway through a year your business desperately needs new computers, you can consult your budget to see how much estimated surplus revenue you will generate for the remainder of the year. Additionally, it will help track if you are spending too much, and whether you need to make cuts.
If you are a business with a few years of operations behind you, your revenue forecasting process will involve examining previous years’ revenues and making adjustments for the upcoming year. If you are a new startup with no business experience, you will need to estimate your total sales, price per product, and do market research to examine what a business of your size can expect to earn.
It’s often tempting to boost your revenue forecasting and imagine a load of money rolling in, but that’s why it’s sensible to create plenty of ‘what if’ scenarios, and to try and err on the side of caution. A good tip is to get a few month’s trading under your belt and then reassess the assumptions you made.
Scenarios allow you to satisfy that dream of becoming a huge financial success story, but they also show you what the more realistic outcome looks like. It’s best to make sure you know what your best and worst case scenarios look like, so you are always prepared no matter what happens.
Don’t be scared to ask for help
Financial planning doesn’t play to everyone’s strengths, however. Even the most experienced of business owners can struggle, so it’s advisable to lean on your accountant when you feel the need to. Chartered Professional Accountants in the UK or Certified Public Accountants (CPAs) in the US are trained to advise businesses in the area of budgeting, and for a fee they can assist you in any aspect of the budget creation process. Try not to think of this as an expense though, the good ones will pay for themselves in time savings and financial gains from following their advice.
If you’re new to the market, and really don’t know where to start when it comes to estimates, you need to research online or ask a financial adviser what the typical margins for your kind of business should be.
Is one business budget a year enough?
While many businesses draft a budget yearly, it’s sometimes advisable for small business owners to do so more often. For startups and small businesses, there is often very little leeway in the budget for variation in costs, so if they do increase unexpectedly, don’t be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages throughout the year, particularly during periodic business reviews. If possible, a savvy business owner will always try to factor in a solid emergency fund.
Budgeting is an easy but essential process to forecast current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to deliver on your financial expectations.