The first thing that came to mind when goods or services started to increase was that people wanted to budget in order to have extra cash for unexpected expenses. But what really is the correct way to budget? It is important to have a clear understanding of the costs to be cut so they do not affect your financial goals and priorities. This will come from the concept of budgeting. By doing so, businesses can avoid overspending and wasting resources and focus on saving for essential business needs.
What is a business budget?
In simple words, a budget in business is a financial plan that is based on the company’s or business’s expected revenue (income) and expenses over a period of time. A little bit different from a personal budget, a business budget is important for planning, control, coordination and allocating resources effectively. When businesses effectively manage their own budget, they could reduce debt, increase allocated resources, gain financial control and improve decision-making.
To prepare and note before starting a budget, businesses need to:
Set Long-Term and Short-Term Goals
To have a proper picture of what to budget for, businesses need to set their goals clearly too. The budget must be able to support all of the goals. The goals could be such things as increasing revenue or expanding into new markets for the business. The alignment between these short-term and long-term goals and the budget is essential. The budget serves as the financial blueprint that ensures resources and expenditures are in harmony with business objectives.
Estimate Business Income for the Budget
By estimating business income and cash flow for a certain period, the allocated funds needed for business expenses can be determined. With this, the budget set can be seen as realistic and achievable. It is important to consider income from all sources and other sources of revenue. The other income source could include returns on investments, asset sales, and bond or share issues.
Identify and Categorize Business Expenses
After estimating income for a certain period, expenses should be categorized for easier planning and control over spending. The three categories are:
Fixed Costs: These are regular, expected costs that don’t change over time, like rent, utilities, subscriptions, and loan repayments.
Variable Expenses: Variable expenses vary depending on aspects like sales activity. Examples include staff salaries, utilities, sales commissions, and transportation and distribution costs. It could differ every month.
One-Time Expenses: One-time expenses or “one-time spends,” are rare and non-recurring spending. Examples are investing in equipment, producing fresh goods or services, employing consultants, and dealing with problems with security.
Observe if the Budget is Profitable or Deficient
You can add your income and expenses to your budget once you’ve taken stock of everything. This is where you decide if your predicted revenue is sufficient to cover all of your expenses.
You have a budget extra if your income is more than your expenses. Knowing this, you should choose the best way to allocate extra money. For instance, you might transfer the funds to a rainy-day account that you can use if your real income is lower than anticipated. As an alternative, you might use the money to expand your company.
Assess Budget Profitability or Deficit
After compiling business income and expenses in your budget, the next crucial step is to determine whether the projected revenue is adequate to cover all of the business expenditures. If the income exceeds the expenses, businesses will have a budget surplus. On the flip side, if expenses go over income, businesses will face a budget deficit. In this scenario, it’s crucial to explore strategies to bridge the financial gap. It may be needed to reassess your expenses, seek cost-saving measures, or explore avenues to increase revenue, such as introducing new products, services, or marketing strategies.
