To run a thriving business, you must carefully oversee many processes, including employee recruitment, marketing your business, finding new clients and establishing your online footprint. But there’s one element you’ll want to keep an eye on from the start of your journey: your business budget.
What is budgeting in business, and why is it important?
A business budget refers to a financial plan based on the estimated expenses and revenues of a business for a specified period of time.
It is significant for businesses of all sizes because the budget allows decision-makers and owners to make informed decisions about allocating resources, such as which projects to fund and which to cut, thus helping an organization achieve its goals. For this reason, creating a budget is a vital skill for any business leader, whether you are an entrepreneur or CEO, a functional leader or manager, or an executive.
How to Create and Manage a Budget: A 6-Step Guide
Now that you know why having a budget is crucial, let’s jump into how to do it. By following these budgeting steps, you can create a financial plan that works for you.
Understand Your Goals
First things first, if you want to create a budget that reflects the goals of your business, it’s salient to understand them. Define your business goals. What are you trying to achieve? Do you want to save money, increase revenue, or reduce expenses? How would you like to accomplish your goals in the next 12 months? Next five years? Ten years? By understanding those goals, you can start setting budgets accordingly because it’s easier to figure out where the money should go.
Examine Your Revenue
Get a clear grasp of your business finances before you start your budget preparation. How much revenue does your business bring in, and what resources derive from it? You could look at your sales figure to discover your sources of income. Likewise, once you have identified your income streams, calculate your monthly revenue. Note that depending on your business model, your number of income sources will vary. However, you will still have to add all the income sources to get a complete picture of your monthly revenue.
Determine Your Expenses
Obtaining knowledge of your expenses gives you the foundation to structure a financially sound business and personal budget. That is why you’ll need to determine your expenses.
This process involves three main categories:
a) Fixed costs are expenses that remain the same regardless of how many products or services a business produces. These expenses are related to overhead, such as rent payments, and utilities.
b) Variable Expenses are expenses that vary depending on the level of production or consumption. Examples of this category include raw materials, labour, and shipping costs.
c) One-Time Expenses are those that happen only once and have no recurring impact. For example, investing in equipment, hiring a consultant, or developing a new product or service are perfect examples of this category.
Put It All Together
After you’ve gathered your income sources and expenditures, it’s time to put it all together and do the math to get a comprehensive view of your financial standing for the month and determine whether you’ve made a gain or loss. Through this, you can create a foolproof and more innovative budget.
Set Aside a Contingency Fund
A contingency fund allows for more financial flexibility in unforeseen costs such as equipment failure, damaged inventory, etc. Setting aside a contingency fund will enable you to plan for these types of events and make sure that your overall budget remains as smart as possible.
Constantly Revisit Your Budget
Regularly reviewing your budget helps you to stay on track with your financial objectives. Remember that your budget will change and evolve with your business, so you’ll need to adjust it based on your profit patterns and growth.
A well-made budget will help you achieve your financial goals. So make sure to follow the tips for making a budget in this blog, and let your business thrive!
With Moolamore, crafting a smart budget plan for your business is feasible. Be part of our Moolamore community and join our Legacy User Group!