“Before you can make money you have to figure out how to spend it’
Drafting a budget helps you track cash on hand, business expenses, and how much revenue you need to keep your business moving.
With a written budget, your chances of succeeding with your business are helped by anticipating future needs, spending, profits, and cash flow. It also may let you spot problems before they mushroom so that you can switch gears.
If you don’t keep a budget, you may not have insight on how your business is performing from year to year, whether there are cuts you can make to improve performance and whether you have the needed funds to purchase new equipment – be it computers, machinery, or expansion.
The need for a Budget
A budget will help businesses figure out how much money they have, how much they need to spend, and how much they need to bring in to meet business goals. Bankers and other financiers may want to see a budget when you ask for a loan. Employees should also be privy to the budget so that they understand where the business is going and are motivated to work harder.
Budgets can also help minimize risk to your business. A budget should be created before you sign a new lease or invest in new machinery or equipment. It’s better to find out that you can’t afford a new office space before you commit to spending a certain amount of money every month.
A 12-month budget can be updated with actual expenditures and revenues each month so that you know you’re on target. If you’re missing the targets set out in your budget, you can use the budget to troubleshoot by figuring out how you can reduce expenses like labor or new assets, increase sales by more aggressive marketing, or lowering your profit expectations.
Essential components of a Budget
The budget should operate according to basic mathematical equation “sales – total cost = profit.”
A budget should include your revenues, your costs, and most importantly your profits or cash flow so that you can figure out whether you have any money left over for capital improvements or capital expenses.
A budget should be tabulated at least yearly. Yearly budgets are also divided up into 12 months, with blank columns next to your estimates to fill in with your actual results as the year progresses. You may want to consult an accountant in preparing a budget, but it also may be something you can do yourself.
The basic budgeting components
- Sales and other revenues.
- Total costs and expenses – Costs can be divided into categories: fixed, variable, and semi-variable.
- Fixed costs are those expenses that remain the same, whether or not your sales rise or fall. Some examples include rent, leased furniture, and insurance, utilities.
- Variable costs correlate with sales volumes. These include the cost of raw materials you need to make products, inventory, and freight.
- Semi-variable costs are fixed costs that can be variable when influenced by the volume of business. These can include salaries, telecommunications, and advertising.
Profits – You estimate this figure by subtracting your costs from your revenues. Once you have profit estimates, you can also start to plan for whether you can purchase new equipment, move to a bigger location, add staff, or give your employees bonuses or raises. You can also troubleshoot your projected costs and see where you can cut if your profit projections aren’t up to expectations.
This article was written by Augustine Matata, a Finance Consultant at Zenuha. For Information, you might want to drop them an email at info@zenuha.com