What Is a Budget for a Business?
A budget is a financial document used to estimate and plan future income and expenses. Following the simple principles, you can create a budget for your business. The budgeting process may be carried out by individuals or by companies to estimate whether the person or company can continue to operate with its projected income and expenses.
A budget may be prepared simply using paper and pencil, or on a computer using a spreadsheet program like Excel. There are also financial software applications like Quicken or QuickBooks that can help with creating and maintaining a budget.
Why a Business Needs a Budget
In the midst of starting and running your business, you may wonder why you need to stop and put together a budget. A properly prepared and updated business budget serves several purposes:
Plan Start-up Needs for Your Business Plan
The first and probably the most-used purpose of a budget is to help you gather information for a business plan, including all the items and expenses necessary for a start-up. You need to know what it will cost you to open your doors on the first day of your business. It includes inventory, furniture and fixtures, computers and software, and, of course, the costs of finding and securing a location for your business.
Get a Business Loan
After a business is up and running, there are still times when you will need your budget and other financial spreadsheets to get a business loan. You will probably need to borrow money from a lender or family and friends for a start-up. A budget shows your lender how much you need for start-up and what your cash flow situation will look like in the first three years of your business. A reasonable budget can increase your credibility with your lender.
Plan Your Spending
Your budget can give you information about how much you can spend each month and how much you can take out of your business as a salary or draw to live on. As you start out, you may not be able to take much, but you can see what the future looks like, and you can plan for your living expenses as you get started.
Know Your Required Profit
If you set up your budget on a "required profit" basis, you can see how much money you need to make to meet all your expenses, including personal expenses. A required profit budget starts with all the expenses you need to pay each month, leaving the required profit as the income number needed to make the budget balance.
How to Create a Budget
The process for preparing a monthly budget for your business requires collecting information and following some simple steps.
First, list all sources of monthly income or revenue. These will include sales and interest from investments. If your business doesn't get paid immediately—using cash or credit-debit cards—deduct a percentage of your expected income for late-payments and non-payments by customers.
List all your required, fixed expenses, like rent or mortgage, utilities, phone. These are payments you must make every month, even if you have less income than expected. If your fixed expenses are too close to your expected income, you may have trouble making your payments. See if you can cut down on your fixed expenses or turn them into variable expenses.
Variable expenses are non-recurrent expenses that are tied to sales. For example, if you have fewer customers, you may need fewer phone or driving expenses. Include expenses to capture new customers in this list, like advertising expenses.
Create columns for actual and budgeted income and expenses, so you can see how the budget works out in real-time.
A Tip for Creating a Realistic Budget
When you are estimating income and expenses, estimate income low and expenses high. In other words, be pessimistic about both income and expenses. Then when something happens (and it always does), you can be prepared.
The budget process for an existing business is different from a business startup budget. An existing business will have a history of sales and expenses, and it isn't difficult to look back and determine average costs and sales for months and years.
The startup budget, on the other hand, has no historical data, so assumptions must be made and prorated (projected) into the future. This article provides a step-by-step process for creating a business startup budget.
The budget creation process works the same way for both personal and business budgets. You will need to first review your income sources, then your expenditures.
Some Business Budgeting Tools
You may wish to use a simple business budgeting worksheet you can use to create your budget. Also, most business accounting software has a budgeting feature. Use the "budget vs. actual" feature to see how your actual spending and income compare with your budget.