Just as a personal budget can help ensure enough money is saved for retirement, a business budget can help ensure the company can succeed long into the future. Budgets also help start-ups step off on the right foot. Even without historical expenses data, taking the time to forecast income and expenses for the month, quarter and year(s) ahead will help keep your business lean, efficient and open for business.
Average your income data by month for as many historical years as possible to get a sense of your business sales receipts. If you have no historical data to use, check industry averages paying special attention to any seasonality in your industry. Also pay attention to the average aging of your accounts receivable. Once this section of the budget is done, you will know how much cash will be coming in and more importantly, when it can be expected.
Having a budget even before you open your doors for business will help with pricing out your services or products. When all your expenses are estimated in a budget, you know how much money must come in each period before a profit is made. Pricing can be adjusted accordingly so you can ensure you are on track. This is even more important if your business is seasonal. If you know sales will be low in the winter months, you will know exactly how much you need to have saved up before the fourth quarter to cover your fixed expenses.
Plan for the Future
Growth is a goal of most all businesses. As you grow, more staff or new equipment may be required. If you have these costs in mind you can determine the right time to add staff. You could start setting aside funds for your capital purchases years in advance. Then when it’s time to expand, funding will not be a limiting factor.
As your business grows and you hire employees, more people will likely have purchasing ability. Having the budget out of the owner’s head and onto paper will help keep everyone accountable and make it really easy to see when and where there are cost overruns. Monitoring expenses isn’t all negative. If you notice one line item not quite reaching up to your forecast, you may be able to move more funds into savings or investing.
Budgets make great additions to internal reports. Adding a budgeted column to a P&L can help business owners and their team make good decisions. Budgets also help employees at all levels know the goals of the business. Finally, budgets may be requested by banks if your business is requesting a loan.
We are BudgetEase. As our name implies, we make budgeting easy. Call us with your questions on preparing and monitoring your budget.