Budgeting is critical for a business. It is the roadmap that shows you where you want your business to go. Without a budget, your business is running in no clear direction and the success of your business would largely depend on your luck.
Many small businesses operate without a working budget, the most basic management reports. Small business owners tend to believe it is only large corporations that need budgeting. However, a well-planned budgeting is crucial to businesses of all sizes from start-ups, to owner-managed small businesses, and to large corporations. Businesses that have been around for a long time understand the importance of tracking and planning.
What is a business budget?
Budgeting can be as simple as laying out the projected revenues and expenses for certain future time period. It can be monthly, quarterly, or yearly. The following shows a simple monthly budget report of a small retail business for the first quarter of 2010.
First, look at the revenue. It is growing. You may notice a substantial revenue increase in March. The owner is going to a big trade show in another city in February. It is believed that the trade show is going to bring in some new customers and orders. The budget figures reflect the expected additional revenue from the trade show.
Then, look at the expenses. Notice that the advertising and promotion expenses are much higher in February. They reflect the additional costs for the trade show. Travelling expenses for the trade show were also estimated and recorded. Some expenses, such as bank charges, rent, and telephone, stay the same month by month. These are fixed costs. They are normally easier to budget. Other expenses, such as cost of goods sold, supplies, and wages, vary month by month. These are variable costs. Most of variable costs are directly related to revenue. For example, when revenue rises, you would generally expect an increase in cost of goods sold. Variable costs are more difficult to forecast. It needs some analysis and research to ensure the forecast is as accurate as possible.
Where do the numbers come from?
The starting point for your budget plan is your historical data if you are already in business for some time. If it is a start-up, you will need to do some research.
Start with revenue. Look at the figures in the past. Think about what you did. Is your business seasonal? What is the trend? Are the sales trending upwards? Look at your plans. Are you introducing new products or services? Do you have special advertising and promotional events? Based on the information gathered, project your revenue figures as accurately as possible.
Once you have the revenue figures, you then work on expenses side. What are the fixed costs? What are the various costs? Are there any major events? Thinking about each major line item and what it is expected to cost.
What are the benefits of budgeting?
Financial budget helps you set goals and objectives. For example, the above budget clearly shows the business is expected to bring in a net income of $5,019 in the first quarter or make total sales of $72,860. The objectives are the destination points, and the budget plan is the roadmap guiding your business to those destinations.
Budget provides you a great tracking tool. After three months, when you look at your budget, you will be able to answer the questions "have I achieved the goals I set three months ago?" or "did I spend what I thought I would spend?" This will help you better understand the mechanics of your business. It can tell you what was working and what went wrong? It can help you identify the areas you can make changes to improve the operation.
Related topics
Fixed costs and variable costs
