Business Budget: What is it and do I need one for my business?

Key Takeaways

  • Great bookkeeping leads to great data for budgeting and planning financial activity

  • A business budget helps you estimate how much money is coming in and going out

  • Your budget should include income and spending projections

  • Budgeting allows you to understand priorities, resource allocation, and financial planning

Being a business owner can be hard work. There are always bills to pay, business meetings to attend, and employees that need guidance. With all of this going on it can be difficult to find the time or motivation to budget and forecast. But if you don't control your finances, they will control you! In this blog post, we'll discuss why you should make sure your company has a budget in place and how it will help your business grow in the long run!

What is a business budget?

There's no way to plan if you don't know how much money is coming in and going out of your business. Budgets help owners compare their financial performance from year to year or month to month so that they're always able to see the trends of what's happening with their company financials. A budget provides an idea of what your company can afford to spend without running out of cash. This includes all expenditures such as salaries, raw materials, utilities, travel spent, and other miscellaneous costs that may come up. It also outlines your organization's financial and operational goals so that you can create an effective action plan.

What should be included in your annual budget?

Your annual budget should include revenue projections, spending related to the cost of goods, and fixed and variable expenses. You'll want to estimate your projected sales for the year so that you have a sense of your revenue potential. It is also equally as important to project your fixed and variable expenses. Your budget should include the following:

  • Income is broken down by revenue stream Your business income is often earned through different revenue streams, i.e. different products or services you sell. It is important to budget the expected income by revenue stream.

  • Cost for inventory purchases The cost of goods sold (COGS0is the direct cost of producing goods sold by your business. Budgeting for inventory purchases is key because it secures enough funding to purchase new inventory and keep the supply chain healthy.

  • Fixed Expenses Fixed expenses are expenses that cost the same amount each month. Budgeting for fixed expenses means identifying and anticipating them for a period of time.

  • Variable Expenses Variable costs are costs that change over time. Budgeting for variable expenses means you have to anticipate and set a limit on these expenses.

  • Debt service payment & Interest If your company has borrowed money, it is important to budget so that you can meet your debt obligations. Budgeting includes accounting for interest and a debt schedule to repay back your loan.

What is the strategic significance of budgeting?

If you’re a business, you must have a budget – essentially, the roadmap to your growth and financial security. Budgeting allows you to understand priorities, resource allocation, and financial planning. Essentially, it enables you to understand your business's strengths and weaknesses to make informed business decisions. Budgeting also encourages growth to increase revenue, control spending, stay on track of financial goals, keep financial commitments, and avoid taking in debt.

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