Budgeting is an important and necessary part of small business ownership.
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To begin with, lenders and investors are going to require a budget before they agree to partner with your company. More importantly, a budget can be a valuable tool to help you meet goals and stay abreast of the financial condition of your business.
A budget is really just a financial plan. It can be as simple or as complex as you want it to be, although a certain level of detail is necessary if it is going to be effective. With that in mind, here are some tips to help you get started.
Do a Reality Check
A budget is not something that is pulled out thin air. It has to be based on figures that can be supported by reasonable expectations. Those expectations are based on a combination of prior financial performance and anticipated business growth (or reduction).
To gather the information you'll need, you're going to have to consult with other people in your organization. Your accountant should be able to provide baseline figures from prior financial periods while sales managers and other key staff can provide a reality check about anticipated sales and expenses. If you don't have other managers in your business, consider running your budget figures by another small business owner you trust.
Specify a Timeframe
Budgets are prepared for a specific time period in the life of your business. They are often based on an organization's fiscal year, but you may also want to budget on a monthly, quarterly, or semi-annual basis.
Even if you prepare a budget based on your fiscal year, you should seriously think about breaking it down on a month by month basis. Most financial software programs make this easy by offering a variety of formatting options for the same budget.
Estimate Income and Expenses
In its simplest form, your budget will be an estimated plan of your income and expenses for the specified timeframe. For a cash-basis budget, income will include any payments you receive from sales, accounts receivable, interest, dividends, or virtually any other source.
Expenses, on the other hand, represent funds that leave your business to pay for raw materials, payroll, administration, real estate costs, utilities - the list goes on and on. No matter how carefully you plan, you will undoubtedly encounter some unexpected costs along the way, so try to leave room for them in the budget.
It's also a good idea to consider when income and expenses will be incurred. For example, if you operate a snowplow business almost all of your income will be received during the winter months. Budgeting your annual income evenly over twelve months would not accurately reflect your situation. A much better approach would be to budget the income for the months you actually expect to receive it.