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Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you must gather company financial data, forecasts, and industry analysis to help you build your business budget.
However, it would be best to keep the company's general business and strategic plans in mind to build your budget, valuable financial information, and analytics.
A business budget is a dynamic financial plan used to estimate a company's anticipated revenue and expenses for an upcoming fiscal period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible to adjust as business plans and the market environment change.
Business budgets should include every source of revenue, or income, anticipated by a firm, along with all possible expenditures the firm might make during a specified time period.
A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipated revenues. Business owners must continually refer to their budget to measure forecasted budget figures against actual budgetary results to know where to make adjustments.
Planning should account for long-term needs as well. For example, if you anticipate a significant expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.
A budget is a foundational framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process:
Budgets enable a business to set goals, priorities, and spending caps accurately and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding are high-priority items like the sources of income and the different types of expenses. These items demand precise bookkeeping and serve as overall business strategy performance indicators.
An adequate budget should break down revenue and anticipated expenses by month, quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or quarter; collectively, they will come together to form your master budget.
The master budget is a comprehensive financial plan based on the strategic plan of the business firm. It comprises two sub-budgets—the operating budget and the financial budget, and each includes a number of more specific budgets.
Businesses relying heavily on seasonal sales revenue are an excellent example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan. A strategy for distributing your revenue most effectively over a full fiscal year will help maximize profits.
In addition to being an essential part of the planning process, budgets are necessary for evaluating your company's performance over the course of each fiscal year. Common types of budgeting in business are:
Using one of these types of company budgets can be another tool for the firm's financial analysis.
For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire other staff to handle the extra business.
A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work.
Lenders and investors want to dig deeply into your finances and history. If they don't see evidence of solid budgeting practices, it might be a red flag that would turn them away.
If you're opening a new business with little or no history, you must make up for that lack of a track record with detailed support for your budget. This means researching the marketplace and showing how past trends or, perhaps, a void in the industry supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors.
Even small businesses with only a few employees must ensure they're adequately staffed for writing and maintaining a budget. If, for example, you own and operate a small café, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.
If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE, a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up mainly of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just starting or confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community.
Some of the best tools for writing and sticking to a detailed budget are software programs beyond Microsoft Excel or other spreadsheet programs. Some of the most helpful budget software programs are:
In addition, you might already be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system. And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses.
When looking for a budgeting software program, you usually want to look for these features:
If a business does not develop a budget, it will face many problems. It is, effectively, flying blind if it is unaware of how much revenue to expect or expenses to plan for during a given period. Such a business will likely fail within the first two years after it opens.
The benefits of business budget planning are many. Here are some of the most important:
Strategic Business Planning provides a framework for a business' financial objectives — typically for the next three to five years.
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