What is a budget and does my business need one?

From entrepreneur.com

Business budgeting is one of the most powerful financial tools available to any small-business owner. Put simply, maintaining a good short- and long-range financial plan enables you to control your cash flow instead of having it control you.

The most effective financial budget includes both a short-range, month-to-month plan for at least one calendar year and a long-range, quarter-to-quarter plan you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year-end to allow ample time for sufficient information-gathering.

Example

Example Budget

The example given is just that, an example and is not meant to be a definitive guide.

A budget is the guide to keeping a business profitable.  All expected revenue and expenses, all inflows and outgoes should be listed .  If you have at least one year in business, last year’s P&L report should be used  as a starting point. If you have multiple years, you should look for trends.  Now is the time to see what changes should be made.  Are you expecting any increases in sales or expenses? Should a new position be added to keep up with the expected increase in sales?  If sales increases by 20% what other expenses should increase as a result? Does that affect your insurance premium? What about your rent? Sometimes rent is tied to a percentage of sales.

 

Using the budget as a guidepost, if the net income shows negative for any month, that can be addressed now.  What can be done to increase sales, cut expenses, or both? One line item that is often missing from most budgets is profit.  Most people think of Net Income as profit.  However, if you have ever read the book, “The Richest Man in Babylon” by George S. Clason, you know about paying yourself first.  This applies to business as well.  You should add a line item for profit, and that should come off the top.

 

We will discuss budgeting in more detail in a later article along with the importance of budget forecasting and budget tracking.

 

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