A business budget is basically an assessment of your entire business finances. It outlines critical information regarding both your current financial situation (including expenses and income) and your long-term financial objectives. As your budget is used to make sound business decisions for the company, it must be among the first priorities that you address. Unfortunately, many businesses are not aware of how to create an effective and fair budget. Therefore, they remain financially afloat but are unable to achieve their business objectives.
Creating a business budget is a process, similar to creating any other financial plan. First, you have to decide what type of budgeting system you want to use. There are several types, including: biannual, annual, monthly, quarterly, and annually. While monthly and quarterly calendars provide essential information for monthly expenses and profits, annual calendars offer more detailed information regarding your year-to-year financial results.
To create a successful business budget, it is important to understand the relationship between expenses and revenues. Expenses occur when a company or organization spends money – on supplies, materials, equipment, and facilities. Residual revenue, however, refers to the income that a company or organization receives, after expenses, for the services or products it provides. Because both expenses and revenues affect your business budget, you need to carefully identify the types of transactions that ultimately contribute to your financial health and growth.
When it comes to identifying which expenses are vital to maintaining a healthy cash flow and achieving your short and long-term business objectives, the most important criteria is that the activity must bring in enough revenue to cover the expense. To determine this, a business owner typically looks at his company’s income statement, which indicates the amount of money that the business receives in wages and salaries, as well as customer accounts receivable and inventory. The difference between revenue and expense, however, reflects the difference between income (revenues) and cost (expenses). If revenue exceeds expenses by a large amount, the business owner will experience positive cash flow, but if expenses exceed revenue by a large amount, the business owner will experience cash flow problems, and may eventually go out of business. Therefore, it is important to carefully match the amount of revenue collected from various customers to the amount of expenses incurred, or the business may go into debt.
In addition to accurately estimating revenue and expense, a good budget also must be designed to carefully allocate spending money. Each dollar of expenditure should go to improve the company’s efficiency, reduce waste, increase productivity, and increase profit. A good budget, therefore, should ensure that a company uses the money spent on its resources in the most effective way possible. For example, if the company spends a certain percentage of its operating budget on advertising, then it is necessary to cut back that amount in order to improve its revenue figures.
Although a business budget can help business owners keep control of spending, many owners find that it is difficult to set up and follow a budget. The difficulty level may vary according to the nature of the business. A small, home-based business may not need to worry about budgetary budgeting as much as a large corporation. However, a large corporation may find that maintaining a strict budget is one of its most difficult tasks. Regardless of whether you own a large or small business, creating a business budget is one of the best ways to ensure financial health.