How To Set up a Business Budget

Budgeting is always helpful since it helps you to track revenue and expenses as well as manage cash flow. But it is helpful only when you do it right as otherwise you risk missing out on opportunities that come with changing market conditions.

1. Benefits of Budgeting for Your Business 

Budgeting does so much more than help you sleep peacefully at night knowing your business will generate enough revenue to pay for your office rent, your Commonwealth Edison utility bill and other business expenses that you are obliged to cover. Budgeting allows you to adjust spending, tells you when to increase marketing to boost sales and allows you to react to an unexpected drop in revenues. In other words, budgeting helps you keep your company on track as you use real-time data to orchestrate business operations. 

It ensures you won’t spend money you don’t have

Budgeting the exact amount of money to pay when your obligations are due helps preserves the liquidity of your business. By knowing you can cover your bills, you don’t have to resort to debt.

It sheds light on the pricing strategy

Market conditions such as your competitors’ prices aren’t the only parameters you need to set your prices. You must know how much it took to produce your product or offering and this involves more than manufacturing and overhead costs. A budget lets you find out the true cost per unit of making your products or delivering your service. Only then you can realistically set your prices to make the profit you want. Don’t be discouraged if the end price is too high for you to be competitive as your budget can also help you to identify areas where you can reduce your costs.

It helps you get funding

Banks, suppliers or lenders will give you money or credit only if you can demonstrate you are a going concern. Prior financial statements prove you are stable but a new business does not have them so you need a budget will show potential partners the impact of their participation. It will also be useful when you get to expand your business.

It makes your business flexible

A budget lets you track your business’ performance throughout the year, allowing you to make necessary changes to stay on top of costs or increase spending to take advantage of growth opportunities. A budget helps you stay more competitive and is a precious tool when you need to lower costs to handle tough times when business activity is lower.

It minimizes risk

A budget should be created before you make any new investment so you know exactly what you’re in for before you commit your funds to buying a new piece of equipment or entering a new lease.

2.      How To Start and Stick To a Business Budget           

Every successful business needs the right budget. There are a few universal tips that can help you make one that works for your business.

Target your sales and the profit you aim to earn

For a startup business, begin by estimating what type of realistic profit you'd like to see in the coming year. If you have been in business for a while, take your company's most recent financial statements. The reason we begin with these two estimates is because the top and bottom lines drive the other figures.

Estimate operating expenses

You need to assess the costs that need to incur for your business to operate. They come as fixed such as rent and variable such as your utility bill which will differ based on your usage. It’s better to slightly overestimate your line-item costs, so you are prepared if the costs end up being higher than anticipated. Your expenses determine the liquidity of your business and liquidity is everything because without it, your business won’t go far.

Gross profit margin

You need to estimate the cost of goods you want to sell and deduct it from sales you expect. As tempting as it is to save every penny, remember that time is money and timing underestimation directly increases costs. If you have poor delivery times, you will also lose your customer’s revenue. It’s better to know upfront what you’re in for before you get in too deep and end up being buried in losses.

Take the time to readjust

This will be most time-consuming part of budgeting as you most likely will need to go back and readjust your estimates to reach your profit targets, such as by changing the volume of supplies, amount of inventory or number of employees. Even when your budget is made and your business comes to life, you should constantly revisit it. The reason why many business fail at budgeting is that they stick with status quo. If you want to stick to your budget, you need to keep it ‘alive’ and adapt it as external conditions change.

Takeaway

Drafting a budget is essential for turning your dreams for business success into reality. This vital tool ensures your business is on track no matter how hard the macroeconomic environment gets. It also allows you to recognize valuable opportunities through which you can achieve your goals even faster. A budget moves you from hoping your business is going in the right direction to ensuring this is the case. The best part is that budgeting is not a science, it’s common sense.