Successful small businesses rely on the effectiveness of the business owners’ planning process. One of the most important elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To start, you should gather your company’s financial data, forecasts, and industry analysis to help you build your business budget.
In addition to financial information and valuable analyses, you should also consider the company’s overall business and strategic plans in order to build your budget.
What is a business budget?
A business budget is a dynamic financial plan used to estimate the expected revenues and expenses of the company over a future period. Essentially, it is a financial plan created by the business for a month, quarter, or year. It should be flexible and adjustable so that it can be modified as business plans and market conditions change.
Business budgets should include every source of revenue expected by the company as well as all potential expenses that the company may incur during a specified period.
A detailed and realistic budget is one of the most important tools for guiding your business. The budget provides essential information to operate within your means, manage unexpected challenges, and achieve profitability. A sound budget will help determine available capital, estimate expenses, and forecast revenues. Business owners should continually refer to their budgets as a way to measure expected figures against actual budget results in order to know where adjustments need to be made.
Planning should also take long-term needs into account. For example, if you expect to make a significant expenditure in a year or two for upgrading computers or maintaining equipment, it is wise to start planning ahead.
Steps in Business Budget Planning
The budget is a fundamental framework for your business financial affairs, outlining past performance and providing a tool for forecasting the financial year or another period based on assets, revenues, and expenses. Here is an overview of the budgeting process:
Budget Preparation
Budgets enable companies to set goals, priorities, and limits through which funding is directed, clarifying funding sources and new strategies that can bring revenue into the company’s coffers. Items in the plan that capture the most funding are among high priorities such as revenue sources and various types of expenses. These items require precise accounting and serve as performance indicators for the overall business strategy.
An effective budget should detail expected revenues and anticipated expenses by month, quarter, or financial year. Depending on the size of your business, budgets for independent departments should also be included and detailed by month or quarter, and collectively, they will form your main budget.
Note: The main budget is a comprehensive financial plan based on the company’s strategic plan. It consists of the operating budget and the financial budget. Each includes a number of more specific budgets.
Companies that heavily rely on seasonal sales revenues are a good example of the importance of budgeting. If the months of June, July, August, and December typically generate 75% of your business revenues, your budget will allow you to plan ahead. This way, you can strategize to distribute your revenues more effectively throughout the financial year to maximize profits.
Using the Budget to Evaluate Company Performance
In addition to being an important part of the planning process, budgets are essential for evaluating your company’s performance over each financial year. Common types of budgets in business include:
- Static budgets: A type of operating budget that uses historical financial data to estimate expected revenues and expenses in the next time period. Usually employed by very small businesses, these budgets require taking each item and adding a percentage increase or decrease to reflect the next budget.
- The budget
- Performance-based budgeting: This type of budget takes into account the inputs and outputs for each unit of the product or service in order to achieve maximum efficiency.
- Zero-based budgeting: Zero-based budgeting starts from scratch every time period and builds a new budget based on the circumstances at that time. In other words, it starts from zero for each item and uses internal and industry financial data to construct the budget.
- Variance analysis: Variance-based budgeting is one where actual and expected values for each revenue and expense item are calculated. The results are used to try to bring budget items back to a certain range and achieve improved efficiency.
- QuickBooks: One of the easiest to use and affordable computer programs that includes budgeting.
- Budgyt: An easy-to-use budgeting software that allows for more than one profit and loss statement.
- PlanningMaestro by Centage: A cloud budgeting program that includes forecasting for small to medium-sized businesses.
- Budget segmentation by departments: Allows you to create budgets by department or profit center and merge them all into the master budget.
- Collaboration: Enables more than one person in your organization to work on the budgeting planning process.
- Variance comparison: Allows you to see actual values versus estimated based on line items.
- Financial health: Without a business budget, it is impossible to know your company’s financial health. You will have no idea whether you have met or exceeded your goals.
- Strategic planning: A business budget allows you to develop a strategic plan where you will know the answers to questions like whether you can expand.
- Securing debt financing: If a small business attempts to secure debt financing from a bank or other financial institution, it must present a budget to show potential lenders.
- Attracting investors: If the company wants to attract investors, these investors will not put their money into the company unless they see a budget.
- Tax preparation: A business budget helps in the preparation of income, sales, and payroll taxes.
- Decision-making: In order to make decisions about any aspect of the business, you must know how much money is allocated to that item.
Using one of these types of corporate budgets can be another tool for analyzing the company’s finances.
For example, if sales in the first quarter are lower than you had estimated in the budget, you will know that you need to find expenses to cut later in the fiscal year in order to remain profitable. A positive example might be sales of a new product exceeding expectations. By tracking this trend and comparing it to what was planned, you will see that you have additional revenue, and you may consider revising the budget with plans to increase production or hire additional staff to handle the extra business.
Using the budget to obtain financing
A history of writing accurate, detailed budgets and sticking to them can demonstrate to potential lenders or investors that you can create a business plan and make it work.
If you are opening a new business and have little or no history at all, you should compensate for this lack with a detailed record of your budget. This means conducting market research and showing how past trends or perhaps gaps in the industry support the numbers you present. This attention to detail can help you gain serious interest from lenders or investors.
Hiring staff to help with budgeting
Even small businesses with just a few employees should ensure they have the right number of staff to write and maintain the budget. For example, if you own and run a small café, you may have a unique menu and a good reputation for customer service, but that doesn’t mean you are a financial professional.
If hiring a full-time person to manage your budget and other financial affairs isn’t realistic, consider getting part-time help or working with an outside consulting firm, especially in the early days and annually when it’s time to write a new budget for the following fiscal year. SCORE, a business mentoring organization from the Small Business Administration in the United States, is largely made up of volunteers with backgrounds in business and finance who offer guidance and advice to small businesses. This can be a valuable resource when you are just starting out or when facing a major challenge. In addition to helping with budgeting or other issues, organizations like SCORE can connect you with other resources in your community.
Budgeting software
Some of the best tools for writing a detailed budget and sticking to it are software programs, which go beyond Microsoft Excel or other spreadsheet programs. Some of the most helpful budgeting software includes:
Additionally, you may already be using services like PayPal or Square or other similar online services with your point-of-sale system. Like the software mentioned above, they provide tools for budgeting and tracking revenue and expenses.
When
When looking for a budgeting program, you usually want to search for these features:
Benefits of Business Budgeting
If a company does not develop a budget, it will face many problems. It essentially operates in the dark if it is unaware of how much revenue can be expected or the expenses that need to be planned during a specific period of time. Such a company is likely to fail within the first two years of opening.
There are many benefits to business budgeting. Here are some of the most important:
In short, if a company does not develop a budget, it will face many problems and is likely to fail. Clearly, the benefits of business budgeting far outweigh these problems and help the company succeed.
Source: https://www.thebalancemoney.com/business-budget-planning-reasons-393029
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