One of the oldest sayings in business is that you have to spend money to make money. But you have to spend your money wisely. And that's where budgeting comes into play.
A basic budget tries to anticipate your spending needs and forecasts your sales and other revenue. A budget helps you predict when money comes in and goes out so you can better manage your cash flow. It's also useful when dealing with bankers on loans. In short, a budget is a useful road map to guide your business through the year.
A good basic budget can:
- Forecast the timing and amounts of your spending
- Set realistic goals for income and expenses
- Give you a standard against which to measure performance
- Help you control your expenses
- Show you when you're overspending so you can adjust
Tap budgeting basics with financial softwareThe three main elements of any business budget are sales revenues, expenditures and profits. To create your budget, you'll need to anticipate a dollar amount for each elements. Existing businesses can look to past figures for guidance; new businesses must make an educated guess.
Estimate your revenuesIt's better to be cautious with your revenue estimates. If you fall short of projections, you could end up without enough money to cover expenses. It's also important to map out when revenues will arrive. For example, in a cyclical business like retail, you need to budget your cash so you'll be able to pay your bills during slow periods while you wait for the bustling holiday season to arrive.
Estimate your expensesCalculate when and how much you'll have to pay for business expenses, including things like cost of goods sold, office supplies, rent, utilities, auto expenses, travel, advertising, professional services, loan repayment and taxes. Companies with employees have additional expenses, including salaries, benefits, employee business expense reimbursements and bonuses.
Put it all togetherOnce you have all your numbers in place, you can begin to see where your money comes from and where it goes, which helps you direct your attention to areas that need improvement.
- Add a cushion: Your business will need some cash on hand for day-to-day operations and unexpected expenses, so be sure to build cash reserve into your budget.
- Use your library: When you're trying to project revenue and need to research your industry, don't overlook your public library, which not only has books and periodicals that might be useful but also reference librarians who can help direct you.
- Take a long look: If a one-year budget is helpful in mapping out your immediate objections, then a three-year budget can help you focus on your longer-term goals and outlook.
- Measure performance: Once you have a budget, you can periodically calculate how you're doing compared to your plan and make changes as needed in your operations.