What is a business budget?
A business budget estimates an organization’s revenue and expenses over a specific period. It should drive important business decisions such as increasing capital expenditure or reducing costs and improving efficiencies in other ways.
The budget needs to be re-evaluated periodically, thus becoming increasingly useful when compared to the actual results for that period. This, in turn, increases the reliability of future budgets and the quality of those decisions.
As the budget also outlines your organization’s financial and operational goals, it may also be considered as a detailed action plan that helps you allocate resources, evaluate performances, and formulate strategies.
What is budget planning?
Budget planning is the process of constructing a budget and then utilizing it to control the operations of a business.
The purpose of budget planning is to mitigate the risk that an organization’s financial results will be worse than expected.
What makes a good budget?
While every ‘good’ budget has the same framework, you will need to think about the unique budgeting quirks of your industry and business type.
Every good budget should include some of these components:
1.Your estimated revenue
This refers to the amount of money the entity will generate, whether from sales of goods or services provided. If the entity is a startup, this figure can be based on contracts already secured or industry norms. If the entity has been in operation for a year or longer, use the prior year’s figures and adjust it for the current year.
2.Your fixed costs
Fixed costs are costs that do not change when your produce more products or provide more services. These costs include things like rent, insurance, utilities, bank fees, accounting, legal services, and equipment leasing.
3.Your Variable Costs
These costs change according to the number of items sold or services provided. Variable costs might include raw materials, inventory, production costs, packaging, or shipping.
Other variable costs may cover sales commission, bank charges, and travel. A clear budget plan outlines what you expect to spend on all these costs.
*The cost of salaries can fall under both fixed and variable costs.
For example, your core in-house team is usually associated with fixed costs, whereas production or manufacturing teams—anything related to the production of goods—are treated as variable costs.
Make sure you file your different salary costs in the correct area of your budget.*
4. Your one-off costs
These are costs that are not regular costs but also need to be considered.
If you have a startup, these once-off costs might be quite high as there are quite a few things that need to be put in place or initiated. Examples of once-off costs could include when you are working on a new project or legal fees for a specific case against a supplier/customer.
5.Your cash flow
This refers to the actual amount sitting in your business bank account and should not be confused with the profit of a business.
A business could have a profit for the year but not have cash in its bank account to pay all its debts. This is a very important cost to keep track of on a monthly basis.
Profit is what you take home after all your expenses are deducted from your revenue. Growing profits mean a growing business.
Here you will plan out how much profit you plan to make based on your projected revenue, expenses, and cost of goods sold. If the difference between revenue and expenses (known as profit) is not where you would like it to be, you need to rethink your cost of goods sold, consider raising prices and embarking on cost-cutting measures.
7. Budget Spreadsheet
The business budget needs to be documented in one spreadsheet that is easy to read. All incomes should be documented as positive figures and expenses as negative. Using an excel document will be useful as you can have formulae to assist with the calculations.
In your spreadsheet, create a summary page with a row for each of the budget categories above. This is the framework of your basic budget.
Next to each category, list the total amount you have budgeted.
Create another column to the right—when the time period ends, use it to list the actual amounts spent in each category. This gives you a snapshot of your budget that is easy to find.
Find out why you need a business budget and what to do if you exceed your budget in part 2.