A budget is a financial plan for a company’s future; an estimation of revenue and expenses over a specified period of time. Creating a budget for your business promotes accurate goal-setting, assists in writing a business plan, informs spending decisions, unifies stakeholders, attracts investors and aids in determining staffing needs. It makes operating your company easier, more efficient, gives you the best chance of achieving your long term goals and helps you reap rewards for your hard work. So, how do you go about preparing a business budget?
- Tally income sources: Determine how much money your business brings in each month and where that money comes from. Tally sources for a 12 month period. Look for seasonal patterns.
- Determine fixed costs: Fixed costs are expenses that don’t change. They may occur daily, weekly, monthly or yearly and include payments such as insurance, rent, website hosting, payroll, bank fees, accounting and legal services, supplies, debt repayment, taxes and equipment leasing.
- Include variable expenses: Variable expenses are costs that change each month based on your business performance and activity such as usage-based utilities, shipping, packaging, sales commissions, travel costs, inventory, production costs, professional development and marketing.
- Predict one-off costs: These costs fall outside the usual work of your company. They may be start-up costs (equipment, furniture, software) or infrequent expenses (business course, cost of moving to a new location, purchase of real estate, purchase of new equipment, large-scale facility upgrades, severance pay, etc).
- Create a contingency fund: Prevent the problems associated with unexpected costs by keeping extra cash on hand for difficulties such as equipment breakage, inventory damage, a security breach, etc.
- Put it all together: Tally the total income and expenses. Then compare cash flow in to cash flow out in order to determine profitability. Adjust the figures throughout the year. As projections change, alter how money is spent and allocated.
- Create a budget spreadsheet: A simple spreadsheet provides you with all the information you need at a glance making summarizing and reviewing your finances easy. Make budget evaluation a regular habit. Monitor and adjust numbers as needed.
Creating a budget takes time and effort but it’s worth the toil. Budgeting gives you the insights you need to make good decisions regarding your company’s finances. It’s an essential process for all businesses and will help you grow your company, compete and ensure a solid emergency fund.
Need help preparing a budget? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.