Why You Need a Clear Budget for Your Business and How You Can Prepare One

Why You Need a Clear Budget for Your Business and How You Can Prepare One

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As a small business owner, it is not easy creating a budget. You have limited funds to keep the business rolling. Before you know it, more expenses have incurred and you need to look for money again. There are a lot of financial woes that you have to deal with almost on a daily basis.

As such, small business budget balancing is essential. You need to have a clear idea of what to include in the budget and how much to spend so you will still have enough savings to be used for next time. Without a clear budget, everything could fall apart. Before you know it, you could have spent the money you were not supposed to. You could also forget to pay certain bills that were overdue, and you will suffer from the penalties.

Proper budgeting allows you to control what goes out of the business. You just need an effective financial budget that is applicable for both short-term and long-term. The reason why you need both types of budgets is that you can be more flexible in updating the annual budget based on how your monthly budget is prepared. However, you need to have a clear fixed amount in mind so that this won’t be a big problem later.

Determine what is important to start the business

There are two main expenses you need to consider when you are opening a business – fixed assets and startup costs. Fixed assets include equipment that you will be using over a long period. This includes computers, furniture, machinery, and others. You also have to consider signage, security deposits, and office decoration.

Prepare for the monthly expenses

You also need to know how much you are going to spend each month. This includes the amount for rental, utilities, phone and electric bills, credit cards, web service fees, subscriptions, outsourced services, and many others. You should also consider the variable expenses, which refer to the expenses that change depending on the number of clients you have on a monthly basis. This includes the price of goods you need to sell or the commission per sale. The packaging and shipping costs should also be considered if you are in a business involving delivery.

Include income statement and balance sheet

Most business owners only use the income statement when making a plan. The best strategy is to use both income statements and balance sheets. This gives you a clearer picture of the entire operation. When your business has kicked off and you intend to add a new product line, you have to also consider what the inventory purchases impact will be, especially with the movement of cash in your business.

The problem with budgeting only based on the income statement is that you won’t have a grasp of how your business is really doing. For instance, if you intend to purchase new equipment you also have to understand how it will affect your budget in the long run. You need to see the bigger picture in creating the budget so that it won’t be just about paying bills every month. You also need a path towards expansion.

Estimate monthly sales

You will never know how much you are going to earn each month. However, after a while, you will have an idea of how much you are getting on average. This helps so that you can create a monthly sales estimate. This is important because this will affect the budgeting process. The budget should have two versions – one in which you are expecting the best-case scenario and the other in which you are expecting the worst. Whatever happens, your budget will be prepared for it. You also need to be realistic. Even if you are expecting a certain number of sales the following month, it does not mean you will also receive the payments in the same month. You have to prepare just in case you do not get what you were expecting.

Use accounting software

Once you have considered all these details, the next thing to do is to simplify the process. Use accounting software so that you can easily see everything that is included in detail. When you change some parts of the budget, you can do it easily. You should also have a team for your business overseeing this part. You want to make sure it is accurate and realistic.

Benefits of having a budget

You definitely need a clear budget if you want to easily run the business without worrying about money later on. You also need to be prepared for the worst. You don’t know what could happen from one month to the next. It is in your best interest to have everything sorted out in advance. Most of all, you will probably need to take out a business loan at some point. As such, having a clear budget could help you in your loan application.

There are lenders who require three years of cash flow statements and some on a monthly basis. Others require quarterly and annual income statements as well. Income taxes may also be requested. Therefore, you need to prepare just in case these documents are required. This gives the lenders a better idea of how your business is doing. This will also help you in your goal to be granted the loan.

The loan might be necessary to keep the business running. Therefore, you need to comply with all the requirements as much as possible.

In the end, you will see just how smooth your business will run when you have a clear budget. It does not matter whether you are doing well in terms of sales or not, your business will still survive for a couple more months. If you are doing badly, you can easily understand what is wrong, so you can always find a way to improve it.

You just need to stay disciplined when you have a budget. Don’t go beyond what is budgeted. Splurging usually leads to failure for many business owners.