What is a budget and why is it important? Show
For example, if you know how much money you earned and spent every week for the last several months, you’ll know how much you can afford to spend if you want to hire a new employee. Budgeting is an ongoing process rather than a one-time exercise because your business revenue and expenses could change at any time. Revisit and rework your budget monthly, quarterly or after changes to your business, such as big expenses, occur. This will help you stay on track to achieve your goals. A budget can help you:
What should a budget contain? Revenue – The actual amount of money received through business activities, including selling products, investments, interest on savings, dividends and other sources. Expenses – All costs associated with running a business, including direct costs (materials or supplies), recurring expenses (rent or electricity), long-term assets that will help your business for years, but are harder to sell (buildings or equipment), and financial expenses, such as loan or interest payments. Expenses can be categorized in two groups:
Profit or Income – The amount remaining after you subtract revenue from expenses. The key to creating a successful budget is to add up all of your revenue sources over a 12-month period, forecast your expenses to estimate your profit (the difference between your revenue and costs), and frequently review your budget through monitoring monthly.
Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you have to gather company financial data, forecasts, and industry analysis to help you build your business budget. Along with the valuable financial information and analytics, however, you also need to keep the company's general business and strategic plans in mind in order to build your budget. What Is a Business Budget?A business budget is a dynamic, financial plan used to estimate a company's anticipated revenue and expenses for an upcoming time period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible so it can be adjusted as business plans and the market environment change. NoteBusiness budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenditures the firm might make during a specified time period. A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. Business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustments. Planning should account for long-term needs as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance. Business Budget Planning StepsA budget is a foundational framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process: Budget PreparationBudgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding arehigh-priority itemslike the sources of revenue and the different types of expenses.These items demand precise bookkeeping and serve as performance indicators of the overall business strategy. An effective budget should break down revenue and anticipated expenses by month, by quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively, they will come together to form your master budget. NoteThe master budget is a comprehensive financial plan based on the strategic plan of the business firm. It is composed of two sub-budgets—the operating budget and the financial budget. Each of these includes a number of more specific budgets. Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits. Budget to Evaluate Company PerformanceIn addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Common types of budgeting in business are:
The use of one of these types of company budgets can be another tool for the financial analysis of the firm. For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business. Budget to Obtain FinancingA history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work. NoteLenders and investors want to dig deeply into your finances and history. If they don't see evidence of strong budgeting practices, it might be a red flag that would turn them away. If you're opening a new business and have little or no history, you need to make up for that lack of a track record with detailed support for your budget. This means doing research on the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors. Staffing for BudgetingEven small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional. If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE, a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community. Budgeting SoftwareSome of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Some of the most useful budget software programs are:
In addition, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system. And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses. When looking for a budgeting software program, you usually want to look for these features:
Benefits of Business Budget PlanningIf a business does not develop a budget, it will face a host of problems. It is, effectively, flying blind if it is not aware how much revenue to expect or expenses to plan to during a given time period. Such a business will likely fail within the first two years after it opens. The benefits of business budget planning are many. Here are some of the most important:
What is the control phase of a budget?The execution and control phase refers generally to the period during which the budget authority made available by appropriations remains available for obligation by the Federal Government.
Why is a budget important in the planning process?For one thing, budgeting helps formulate the company's activities, allowing it to better understand priorities, figure out how resources can be allocated, and which areas need to be reevaluated. Another factor that's part of the importance of the planning process is the ability to set realistic goals.
What is budgeting for planning and control?Summary. Budgetary planning and control is the most visible use of accounting information in the management control process. By setting standards of performance and providing feedback by means of variance reports, the accountant supplies much of the fundamental information required for overall planning and control.
What are the steps in planning a budget?Six steps to budgeting. Assess your financial resources. The first step is to calculate how much money you have coming in each month. ... . Determine your expenses. Next you need to determine how you spend your money by reviewing your financial records. ... . Set goals. ... . Create a plan. ... . Pay yourself first. ... . Track your progress.. |