Creating a business budget can be an overwhelming task and you may not know what to include or what outcome to expect from it. Due to this, we have created a quick guide on some of the important things to include in your budget.
What is a Business Budget?
A business budget is a financial plan which outlines the actual and budgeted cost of running a business to maximise efficiency and profit. There are many reasons a business might opt in to create a business budget, for instance:
- To control income and expenditure
- Set targets and priorities for growth and business efficiency
- Set goals and objectives that are achievable and practical for the business
- Communicate targets from management to employees, motivate staff and monitor performance
If you’re not sure whether you need to draft a budget for your business, it’s worth speaking to a business lawyer.
What to Include
Before you start with your budget, it’s important to establish two sets of paperwork, a profit and loss reportand a balance sheet.
A profit and loss report tells you whether you are making money or losing it by subtracting your expenses from your income. These expenses include your fixed and fluctuating costs. For example, your fixed costs may include your salary, rent, insurance and any other known costs. Additionally, your fluctuating costs may include utilities, direct costs of materials and staff wages.
A balance sheet showcases the businesses financial situation by showing what the business owns, owes and as well as the amount invested in the business.
Correspondingly, there are three important things and variables to include in your budget as they will maximise the effectiveness of the budget. These include revenue, cost of goods and operating expenses.
Revenue
Revenue is the total amount of income you get directly from the sale of your goods or services. It’s important to note that the revenue of your business is what you made before expenses are taken away from it. You will be deducting this later in your budget.
Cost of Goods
Cost of good may include the direct materials and direct labor expenses that goes into producing the goods or services your business provides.
Operating Expenses
Some of your operating expenses may be your rent, any sales and marketing expenses, general and administrative, transportation and any tax and licenses that may apply to your business.
Budgeting vs Forecasting
Budgeting and forecasting are often linked, however, it’s important to note that they are completely different things.
A budget, as stated above, is a financial plan of your known costs of running your business. Accordingly, this allows for budgets to be assigned to things that you know in advance.
However, a forecast is a prediction based on past and current trends in your financial statements. This gives you a more realistic assumption of where your business is headed in the future.
Online Resources
You can find online resources on things like cash flow statements and debt financing. Specifically, you can find online templates for:
- Cash flow statements
- Start-up costs
- Balance sheets and
- Profit and loss / income statements
Running a business requires careful planning, and this no more important than in your budget. Your budget will determine how you’ll grow, operate and maintain your business.
