Summary: Preparing a Budget for Your Business
Preparing a budget for your business gives a realistic target for your business to reach. It also gives the company the ability to monitor actual results to the budget in order to spot trends and to keep the business on track during the year.
When preparing a budget for your business, start with sales, then move on to expenses. Ensure to capture all costs. Any missed costs could greatly reduce your budgeted profit when comparing to actual results.
Preparing a monthly cash flow budget can help identify cash shortfalls or lean times during the year, so that they can be planned for in advance.
The Importance and Benefits of Preparing a Budget for your Business
Budgeting is important for every business because it helps create a roadmap for how you expect the year to go. As you prepare your roadmap, think of it as setting your business’s goals for the next twelve months. What is the volume of sales that your business will achieve and how are you going to get to that number? Do you have the right people and resources in place? This will help to give you structure when creating your operating budget and to predict what difficulties you may encounter.
By first setting targets that are within reach and knowing that the goal is achievable, the rest of the budget will fall into place.
One of the biggest benefits of an accurate budget is the ability to compare it to actual results. Trends can be identified, both positive and negative. Being able to identify these trends early will allow you to adjust them to align with your goals. This will help to keep your business on track during the year so the goals that have been set at the beginning are reached.
Start with Sales
Estimate sales for the year. This can be difficult to do as the future can be unpredictable, but make your best guess. Break it down month by month and see what the total comes to. Does that number seem reasonable for where your business currently stands and what it is able to achieve? Don’t worry about being exact; remember, this is just the goal for the year.
Move to Expenses
Estimate all the expenses that first come to mind and that are easily identified. Then identify other expenses that are uncommon or easily forgotten. See the list below to get you thinking:
- Advertising and promotion
- Credit card fees
- Interest on debt
- Office supplies
- Professional fees
- Repairs and maintenance
Your budget should be profitable at the end so bear in mind that any missing expenses will reduce this final number.
Remembering to include income tax in your budget can prevent surprises at tax time.
Create a Cash Flow Statement
After completing the operating budget, prepare a cash flow budget. Even if you have prepared the best, most accurate budget in the world, it won’t matter if your business runs out of money part way through the year and is forced to close.
For many businesses, when a sale happens, the cash is not always collected the same day. This creates a timing difference between your budgeted monthly income and cash in the bank. Many items like payroll happen every 14 days but you may not collect the cash from a sale for up to 30 days or longer. To determine where shortfalls may exist, it is important to plan each month by assessing what the cash inflows and outflows will be and if there are any cash shortages along the way.
Knowing about these cash shortfalls early in the year will help to develop a plan for that time period, whether it is applying early for a loan or getting a line of credit. Banks will be more willing to help figure out the best solution if it is known months in advance and if they are able to see where the business is headed because you have a great budget.
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