Business budgeting is an indispensable tool that can help ensure business success.
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But, surprisingly, many business owners don't understand what business budgeting is and why they ought to be doing it.
Keep reading this article if you want to understand the basics of business budgeting and why every business owner needs to put together a budget at least once a year.
Definition of a Business Budget
A business budget is simply a forecast of all of your business cash sources and business cash expenditures.
In other words, the budget answers a simple question: In the months to come, what money will come in to your business and what money will go out?
Typically, a business budget covers a one-year timeframe, delineating expected revenues and expenses on a month-by-month basis.
Many business owners don't put their budgets down on paper, but they prepare a budget nonetheless.
If you estimate how much cash you will have left in your business checking account at the end of the month after paying your bills, then you are engaging in a very simplistic form of business budgeting.
Business Budgeting Math 101
Let's start with the basics of business budgeting:
Sales = Costs + Profits
This simple mathematical equation shows that the dollars you make from sales must cover your costs and your profits.
For example, if you estimate your costs will be $10,000 for a month and you want your profits to be $5,000 each month, your sales forecast better be $15,000 a month. If not, you've got a problem.
Another way of looking at is if you think you can sell $15,000 in revenues every month and you want to pull $5,000 out of the business in profit, you better be able to keep your costs at $10,000. If not, you've got a problem.
It's a very simple formula and a very simple process, but you'd be surprised how many business owners never put together a budget. That leads to a very myopic view of the world and it greatly increases the chances of business failure.
Why Create a Business Budget?
The biggest benefit of business budgeting is that reduce the number of business surprises that will come your way, especially unpleasant ones like not having enough money to pay a vendor or make payroll.
With a business budget in hand, you can perceive problems before they occur and devise strategies and plans to prevent those problems.
Because budgets are forward-looking documents, they force you to think strategically about the future of your business. By examining how much cash you have to spend, your expenses and how much you need to earn, you tend to solve problems long before they occur.
Think of it as a crystal ball for your business. By looking at your business budget, you get to see the future. If you don't like what you see, you can change the future by making business decisions that will alter your inflows and outflows.
To be sure, a budget can greatly improve your chances of success by allowing you to calculate future needs and plan profits, spending and overall cash flow.
The bottomline? A business budget is the tool you need if you want to translate your business plans into a successful business reality.