A budget is a comprehensive financial plan for achieving the financial and operational goals of a company. When used correctly, a budget is the map of the company’s strategic plan. In creating the budget, the company is developing its objectives for the acquisition and use of its resources. Once in place, it becomes a valuable benchmark to determine how well the steps taken by management are ensuring objectives are attained.
A budget is a plan to:
- Control the finances of the business
- Ensure that the business are able to fund its current commitments
- Enable the company to meet its objectives and make confident financial decisions
- Make sure that the business has money for future projects.
The benefits of budgeting:
- Budgeting can help a business to estimates revenue, plans expenditure and restricts any spending that is not part of the plan
- Budgeting ensures that money is allocated to those things that support the strategic objectives of the business
- A well communicated budget helps everyone understand the priorities of the business
- Formalizes the coordination of activities between departments while aligning these activities to the company’s strategic plan and that they are working towards the same goal
- Provides the assignment of decision-making responsibilities and enhances management’s responsibility
- The process of creating a budget provides opportunities to involve staff, resulting in them sharing the organisation’s vision
- Engaging the team in reviewing and comparing the budget with actual facts can provide information that highlights the strengths and weaknesses of the business.
- Improves performance evaluations – providing a common base for discussion on how well the manager met his goals
- Providing a talking point concerning why actual results veered from the original budget
A good budget shall include the following 7 components of;
1Bookkeeping
Keeping record of the numbers is essential to keep track of where the money had gone to, and what amount had flown into the account that is available for use. A record of last year’s numbers or industry averages (for startups) can help a company roughly grasp the estimated financial in and out for the current year.
2Fixed costs
Fixed costs are regular and consistent costs such as rental, utilities, insurance, legal fees and equipment leasing.
3Variable costs
Variable costs change accordingly to production or sales volume such as raw materials, inventory, packaging, production costs or shipping. Sales commissions, credit card fees and travel expenses can be variable costs too. Salaries can fall under both fixed and variable costs as the core in-house team is usually listed as fixed costs whole production or manufacturing teams are treated as variable costs.
4One-off costs
One-off costs usually fall outside the usual work of your business does and doesn’t repeat often. Examples include furniture, software, renovation, moving of office as well as other costs associated with launch, events and researches.
5Cash flow
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Cash flow is the money travelling into and out of your business. You will have a positive cash flow if there is more money coming into your business than going out, over a period of time. This can be calculated by subtracting the amount of cash available at the beginning of a set period of time and the end. This should be monitored weekly, or at least monthly. You could be raking it in, but not have enough cash on hand to pay your suppliers after deducting your other expenses.
6Profit
REVENUE – ALL EXPENSES = PROFIT. The better the growth of profit, the better the growth of your business. Here, you can plan out how much profit you plan to make by adjusting your profit margins, costs, and selling price. If you can’t squeeze any more profit margin out of your business, consider boosting your sales through advertisements and promotions in line with your budget to increase total sales.
7Budget calculator
Budget calculator should be an essential part of your budgeting to help you see exactly where you stand in your budget planning.It might sound obvious, but getting all the numbers in your budget in one easy-to-read summary is really helpful.
Try some online or downloadable tools to make things easier for you. Google sheets have plenty of budget templates that are pretty straightforward. They are easy to use and they translate your numbers into clear tables and charts on a concise, visual summary page.
If you’re running your business without a proper budget you may be actually just running around in circles and not meeting your long-term goals. By taking the time now to set a budget, you will free up time in the future and give yourself the best chance of achieving the rewards you want for your hard work.
