Creating a budget is a fundamental step towards achieving financial stability. By understanding your income and tracking your expenses, you can get control over your finances, reduce stress and be prepared for unexpected expenses. Here is how to make a budget.
What is a business budget?
A business budget is a detailed financial plan. It outlines your organization’s expected income and expenses over a specific period, normally a fiscal year.
A business budget can help your business with:
- Managing your company’s finances
- Predicting future performance
- Making informed business decisions
By providing a clear picture of where the business stands financially, a budget helps to make sure that all resources are allocated effectively. It also helps to keep track of achieving your strategic objectives.
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Why do you need a business budget?
A business budget is essential for many reasons. Your business budget will help the overall health and success of your organization. Here are some of the reasons why you need a business budget:
- Financial control and stability: A detailed budget helps you track and manage cash flow. It’s important because you can know that your business has enough funds to cover operational expenses and avoid crises. It also helps with preventing overspending.
- Goal setting and planning: A business budget helps with setting and achieving both short-term and long-term business goals. By having a business budget, you can forecast future revenues, expenses and profits. This helps you to do better decision-making and long-term planning.
- Measuring progress: You can regularly compare actuarial performance against the budget, and see if your business is performing well or underperforming. This also allows timely adjustments to business strategies, making sure that goals remain achievable and resources are utilized effectively.
- Funding and investment: Lenders and investors often require comprehensive financial plans and budgets to assess the viability and profitability of a business. A well-prepared budget shows confidence to your stakeholders, showing that the business is well-managed and financially responsible.
By maintaining a comprehensive business budget, you equip your organization with a powerful tool for financial management and strategic planning.
What should a business budget include?
A complete business budget should cover various financial aspects. This provides a clear and detailed picture of the company’s financial health and performance. Here are some of the things your business budget should have:
1. Revenue projections
A revenue projection is an estimate of the amount of money a business expects to generate over a specific time period. It includes sales forecasts and additional income. The sales forecast estimates the expected revenue from product or service sales based on historical data, market trends and sales strategies. The additional income includes other sources of income, like investments, grants, interest earnings and miscellaneous sales.
Revenue projections help your business to set financial goals, assess the viability of new projects, manage cash flow, and secure funding from investors or lenders.
Do you need a helpful business budgeting tool? Download our free spreadsheet template here.
2. Expense estimates
You should also include expense estimates, as you will get a good look at your costs. These are divided into fixed, variable, and on-time expenses.
Fixed costs
Fixed costs regular, recurring expenses that remain relatively constant each month. Some examples are salaries and wages, insurance, utilities or loan repayments.
Variable costs
These expenses fluctuate with the level of business activity. It can be raw materials, inventory costs, production or manufacturing costs, sales commissions and shipping and delivery costs.
One-time expenses
One-time costs are simply costs that are non-recurring. It is often for specific projects or purchases. Some examples are capital expenditures, legal or consulting fees, renovations or office improvements.
Read also: 5 invoicing tips for beginners
3. Cash flow management
Cash flow is movement of money in and out of your business. Efficient cash flow management is making sure that your business has sufficient liquidity to operate smoothly and grow further. This includes cash inflows and outflows, with detailed tracking of all sources of incoming and outcoming cash, receipts, expenses, account payable and more. You get much better control if you have this in your business budget.
Read also: Mastering cash flow management for small businesses
4. Profit and loss statement
A Profit and Loss (P&L) statement, also known as an income statement, is a financial report that summarizes the revenues, costs, and expenses incurred by a business during a specific period, typically a fiscal quarter or year. The primary purpose of a P&L statement is to provide a clear overview of your company’s financial performance, showing whether your business has made a profit or incurred a loss during the reporting period.
When looking at your profit and loss statement, you should subtract your expenses from your income. Every expense and costs should be included.
Gross profit = Total revenue – costs of goods sold
Want to calculate your profit and loss statement in an easy way? Download our profit and loss statement for free.
If your incoming revenue exceeds your outgoing costs, you are generating a profit. Conversely, if your costs surpass your revenue, you are incurring a loss. While experiencing a loss might be acceptable in some situations, consistently operating at a loss is not sustainable in the long run.
5. Balance sheet
A balance sheet provides a picture of your business’s financial worth by detailing the difference between what the business owns and what it owes. On the positive side of the balance sheet, you’ll find:
– Business Assets: These include the value of physical assets owned by your business, such as work tools, equipment, or real estate.
– Cash Reserves: Any cash you have in the bank.
– Accounts Receivable: Invoices that have been sent to clients but have not yet been paid.
Do you need some help with the balance sheet? Download our balance sheet template for free.
On the other side of the balance sheet are your liabilities, which encompass:
– Pending Expenses: Bills from suppliers and other expenses that have been incurred but not yet paid.
– Taxes Payable: Taxes that need to be paid in the near future.
– Debts: Loans or other business debts that your company has incurred.
The balance sheet provides a clear picture of your business’s net worth by subtracting your total liabilities from your total assets.
Read also: How to turn an idea into a business
How to make a business budget
Creating a business budget is essential for managing your company’s finances effectively and ensuring long-term success. Here is a step-by-step guide on how to make a comprehensive business budget:
1. Gather financial information
Collect past financial statements, including income statements, balance sheets, and cash flow statements. This data will provide a baseline for your budget. Understand the current market conditions, industry trends, and competitive landscape to make informed forecasts.
2. Estimate revenue
Project your future sales based on historical data, market conditions, and sales strategies. Break down the forecast by month, quarter, or year. Include additional sources of income, such as investments, interest earnings, or grants.
3. Determine and identify costs
Identify costs that vary with business activity levels (fixed costs), and account for major expenses that are not regular (variable costs). You should also look if there are any one-time-expenses. It’s important to include administration costs as well, like office supplies, subscriptions and maintenance.
4. Project cash flow
Estimate when and how much cash will be received from sales, investments and other sources. Predict the timing and amount of cash needed to cover operating expenses and other costs as well. Download our free project cash flow template to learn more.
Read also: The ultimate guide to liquidity and cash flow
5. Profit and loss projections
Calculate a profit and loss statement is to show if your company has made a profit or a loss after a specific time period. Calculate by subtracting the cost of goods sold from total revenue. You should also look at operating and net profit. Subtract operating expenses from gross profit to find the Operating Profit. For net profit, determine the remaining profit after accounting for all expenses, including taxes and interest. Get a free profit and loss statement template here.
6. Monitor and adjust regularly
Make sure that you are regularly comparing actual financial performance against the budget to identify variances. Adjust and update the budget as needed, based on changes in market conditions, business priorities or unexpected expenses.
7. Use budgeting tools
We highly recommend using budgeting tools for a smoother operation of your business. For example, you can use Conta for free to automate and streamline the invoicing process.
Sign up for freeBudget calculator
You can get good help from a budget calculator. It can help you to understand where your business stands when you are doing your business budget planning. Getting a summary of all your numbers in one place can be very helpful.
Do you need a free budget tool? Download our free budget template here.
Helpful business budget tools
Using the right tools can simplify the budgeting process and help you maintain accurate financial records. Here are some helpful, free business budgeting tools:
