Creating a business budget for a company is a tricky task. Some companies avoid the idea of creating business plans, and that’s a big mistake. Check out the article to learn about the importance of budgeting. You will also learn a few tips on creating a successful budget.
Understanding a Business Budget
Before getting into the detail of creating a budget, it’s critical to understand what it is and how it helps a company or an organization. A budget is a detailed plan that aims to help manage and track business finances.
Typically, the business plan uses data from the previous year and relevant market data from the industry to set operations in the next year.
If it’s the first company’s fiscal year, it’s not a problem to create a budget from scratch. Business owners don’t have data from the previous year, but they can research the current market and their industry to figure out where to start. It’s necessary to focus on startup costs, potential sales volume, and variable expenses within your industry.
When creating a budget, it’s recommended to figure out what funds will be available and how to distribute the money. A business plan helps to estimate and avoid unnecessary expenses, optimize all processes within the company, maximize profits, avoid going into debt, etc.
Depending on company type, a plan may be static or flexible. Let’s dive into the details.
A static plan means it won’t change even if other factors are altered. If a company owner creates a static plan for a specific period, it can’t be changed. The changes include the following factors:
- increase in sales;
- costs of materials;
- other changes.
In simple words, the static plan is not open to changes. Static business plans aren’t useful in industries that often have internal changes.
Parts of a flexible budget can change if there is such a need. When business owners receive new data about the production, actual sales, economic factors, and other changes, they can adjust their plans to improve business processes.
Flexible budgets can be of three types:
- Balanced budget. It means that a company’s expected profit and expenses are equal. That way, the company should break even.
- Surplus budget. According to this plan, the company’s profit is expected to exceed its expenses. As a result, the company gains a surplus of extra money.
- Deficit budget. It means the company’s expenses are higher than its income. It means an accountant or a company owner must readjust the budget and find ways to bring in more revenue and get rid of unreasonable costs if possible.
These are a few types of small business budgets. Now let’s see why it’s important to create a plan.
The Importance of a Business Budget
It’s impossible to be successful as a business owner without having a budget. It’s how companies make sure most of their business operations are successful.
Some companies manage to achieve success even without a plan, so business owners are in doubt if they need to put some effort into this task. But overall, creating a budget is useful because the business is more organized. There are other reasons to come up with a budget:
- To get data to make critical decisions.
- To avoid mistakes when operating a company.
- To analyze the market and the industry.
- To determine the target audience.
- To set realistic objectives and benchmarks.
- To get investors, obtain credits, etc.
- To reduce risks.
Creating a budget for every fiscal year enables business owners to set goals, priorities, and spending limits accurately. Companies may also identify potential business opportunities to increase cash flow, find new profitable directions, and analyze whether the performance meets expectations.
A Comprehensive Guide to Creating a Budget
As mentioned, plans may be static or flexible. The flexible type is definitely better since it’s adjustable. Every good flexible budget is supposed to include the following components:
- Estimated revenue.
- Fixed costs.
- Variable costs.
- One-off costs.
- Cash flow.
- A budget calculator.
Now let’s dive into the details about each component of the budget.
The estimated revenue is the amount of money a company expects to get from selling goods or services. It’s the total amount of cash a company brings, regardless of how much it spent to get the revenue.
It’s the first thing to note in the budget. The data may be taken from the previous year. If it’s the first time launching the company, then set the number by taking average numbers within the industry.
Fixed costs are expenses that don’t change depending on how much a company makes. These costs include:
- utilities (unless the company produces goods and depends on electricity);
- bank fees;
- insurance payment;
- equipment leasing;
- accounting and other legal services fees.
These are expenses that change according to production or sales volumes. Typically, variables include:
- raw materials;
- production costs;
- credit card fees;
- sales commission.
The plan should include how much the company is planning to spend on all these expenses.
These costs aren’t typical but can occur, for instance, costs on moving offices, equipment or machinery, etc. The list may also include costs related to launching the business or researching the industry.
Cash flow is critical to every business. If money is coming in, it means that the company has a positive cash flow. It’s vital to monitor the cash flow as often as possible to ensure you have enough money to pay for supplies and support crucial business operations. Consider checking the cash flow at least once a month.
Profit is the amount of money a company takes after deducting all expenses. It’s the section of the budget where you have to estimate how much profit you plan to generate based on a company’s projected revenue, expenses, cost of goods sold, etc.
If the difference between the profit and expenses isn’t a good number, it means you may need to rethink the costs of goods sold. To increase the difference, reevaluate how much it costs to produce goods or offer services and how much you can raise prices.
A Budget Calculator
The budget calculator can be created manually. It’s a comprehensive page on the spreadsheet where you should present a summary of the budget.
In the budget spreadsheet, create a summary page. Add a separate column for each of the categories mentioned above in the article. It will be the framework of the basic budget. The next step is to list the total amount a company has budgeted next to each column.
The final step is to create the column to the right to record amounts a business spent on each category. This framework gives a simple summary of the overall situation in the company so you won’t have to surf through tons of documentation and data.
Business Budgets for Different Company Types
Even though most budget frameworks are similar, it’s important to consider the peculiarities of each industry. For example by:
- Ecommerce should pay extra attention to shipping. Shipping has a huge impact on the budget since it often leads to extra costs.
- Seasonal businesses. It’s critical to spot seasonal trends and analyze the market to analyze how much money a company may spend and generate revenue. Moreover, when creating a budget for each fiscal year, don’t take the same number. It’s vital to consider each year’s potential or actual trends.
- Companies with inventories. Inventories often produce a lot of expenses, and sometimes they aren’t reasonable. It’s critical to consider a good inventory management system and write down all potential expenses into the budget.
- Custom order businesses. When working on customized orders, it’s difficult to set the same amount spent on producing each goods type. Consider taking the average amount to write it into the budget.
- Startups. If you’re starting a startup, make sure to spend extra time on research. You have to analyze the industry, what payments employees receive for their work, etc. The tricky part is that companies don’t have previous years’ budgets and startups often focus on innovations.
Companies creating budgets are more organized and can control how much they spend and whether these expenses are reasonable. Undoubtedly, this accounting tool positively impacts revenue.
Budget Templates to Use
It may seem overwhelming when it comes to budgeting, but it’s a necessary step. There are tools that can make it easier to create a budget. Here are some of them.
It helps businesses to keep them prosperous by offering an automated invoicing and reporting function. It’s possible to work with all employees in real-time, so they can submit their expenses, manage leave, and send invoices. As a result, you get all the data required to create a budget.
Quickbooks is a perfect tool for small businesses. It has functions that track the company’s expenses and revenue by connecting all bank accounts, credit cards, and electronic wallets like PayPal. Moreover, the platform even helps with categorizing taxes, so it’s a lot easier to keep data organized. Quickbooks is a great tool for budgeting.
The aim of this platform is to offer small businesses access to the same data and thus privileges as big corporations get. The platform offers a template for an integrated income statement, balance sheet, cash flow statement, etc.
As a result, business owners have financial data in front of them in just a few clicks. PlanGuru has such a name for a reason. With this platform, it will be a lot easier to plan a budget, even if you have just started.
Efficient Budgeting Tips
Whether you are a beginner or have been in business for a while, it’s never too late to start budgeting. Yes, it’s a tricky task, but it’s possible to make it easier with the following tips:
- Invest in accounting software. We have already mentioned some of the useful examples above in the article. It may cost money, but it’s worth the investment.
- Hire an accountant. It’s not necessary to add an accountant to the staff since businesses can use the services of outstaffing and outsourcing companies. An accountant is someone who can make things with budgeting a lot easier and take off the burden from your shoulders.
- Break the process into small steps. Don’t try to create a budget in one day. Take it slow and spend one day on each budget part.
These tips should make it easier to budget in the beginning when you don’t have the required experience.
The biggest benefit of having a budget is the aid it gives when it comes to strategic decisions. The budget gives an approximation of how much revenue the company can gain, whether it’s possible to invest in business processes for optimization to get bigger revenue in the future.
Having a business plan also means the company can expect to get finance. Most financial institutions require showing an income statement and a budget to see whether the company is a good option for investments.
But the biggest advantage is confidence in the future. Planning makes things easier since you plan for all potential risks and situations.
Author: Charles Lutwidge