They serve as a plan of action for managers as well as a point of comparison at the period's end. So how do budgets work, and how can they be used to gauge where a business is going? In this article, we'll introduce you to budgeting and show you how businesses use them.
You've just purchased or opened a small business and you know your trade. The good news is that it is possible to come up with a budget, or at least a good estimation of what will be needed in terms of dollars and cents fairly easily.
Estimating and matching expenses to revenue real or anticipated is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves.
Without a budget or a plan, a business runs the risk of spending business report types and purposes of budgets money than it is taking in, or conversely, not spending enough money to grow the business and compete.
Getting Started with a Budget Every business owner tends to have a slightly different process, situation, or way of budgeting.
However, there are some parameters found in nearly every budget that you can employ. For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, cost of goods sold expenses raw materialsinterest and tax payments.
The point is every business owner should consider these items and any other costs specifically associated with the business when setting up shop or taking over an existing business. With a business that is already up and running, you can make assumptions of future revenue based on recent trends in the business.
If the business is a startupyou'll have to make assumptions based on your geographic area, hours of operation and by researching other local businesses. Small business owners can often get a sense of what to expect by visiting other businesses that are for sale and asking questions about weekly revenue and traffic patterns.
After you've researched this information, you should then match the business's revenue with expenses. The goal is to figure out what an average weekly expense for overhead, utilities, labor, raw materials, etc. On the flip side, owners may realize that in order to have three employees instead of two, the business will have to generate more in revenue each week.
These six simple tips will help you put together a top-notch small business budget: Check Industry Standards Not all businesses are alike, but there are similarities. Small businesses can be extremely volatile as they are more susceptible to industry downturns than larger, more diversified competitors.
Make a Spreadsheet Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on.
Do the same thing for rent, taxes, insurance setc. How to Set Up a Budget.
Factor in Some Slack Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone.
Because of this, it's wise to factor in some slack and make sure that you have more than enough money socked away or coming in before expanding the business or taking on new employees. Look to Cut Costs If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting.
Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycleor to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide the business owner with much needed breathing and expansion room.
Review the Business Periodically While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.
To learn more, see " Establishing Budget Goals. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.
The Bottom Line Budgeting is an easy, but essential process that business owners use to forecast and then match current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid emergency fund.
Trading Center Want to learn how to invest?
Get a free 10 week email series that will teach you how to start investing. Delivered twice a week, straight to your inbox.A budget is a financial plan for the future concerning the revenues and costs of a business.
However, a budget is about much more than just financial numbers. Budgetary control is the process by which financial control is exercised within an organisation. Budgets for income/revenue and expenditure. There are two types of control, namely budgetary and financial. This chapter concentrates on budgetary control only.
This is because financial control was covered in detail in chapters one and two. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as: "The.
Budgeting is an integral part of running a business efficiently and effectively. Learn more about the two types of budgets that companies commonly use: static and flexible. The following types of budgets are commonly used by businesses: Master Budget A master budget is an aggregate of a company's individual budgets designed to present a complete picture of its.
The budget of a government is a summary or plan of the intended revenues and expenditures of that government. There are three types of government budget: the operating or current budget, the capital or investment budget, and the cash or cash flow budget. The purpose of budgeting is to enable the actual business performance to be measured against the forecast business performance i.e.
is the business living up to our expectations. In the figure opposite, " variance " is the difference between budgeted expenditure and actual expenditure.