Learn more about how a business budget works and get an example of one.
What Is a Business Budget?
A business budget provides an accurate picture of expenditures and revenues and should drive important business decisions such as whether to increase marketing, cut expenses, hire staff, purchase equipment, and improve efficiencies in other ways. It also outlines your organization’s financial and operational goals, so it may be thought of as an action plan that helps you allocate resources, evaluate performances, and formulate plans.
How a Business Budget Works
The basic process of planning a budget involves listing your business’s fixed and variable costs on a monthly basis and then deciding on the allocation of funds to reflect goals. Businesses often use special types of budgets to assess specific areas of operation. A cash flow budget, for example, projects your business’s cash inflows and outflows over a certain period of time. Its main use is to predict your business’s ability to take in more cash than it pays out. Most businesses have fixed costs that are independent of sales revenue, such as:
Building or office eases or mortgage costs Loan payments (if using debt financing) Insurance Vehicle leases (or loan payments if the vehicle is purchased) Equipment (machinery, tools, computers, etc.) Payroll (if employees are on salary) Utilities such as landline phone and internet charges
Variable costs increase or decrease according to the level of business activity. Examples include:
Contractors’ wages or commissions (for salespeople) Utilities such as electricity, gas, or water that increase with activity Raw materials Shipping and delivery costs Advertising (can be fixed or variable) Maintenance and repair of equipment
It is important to be realistic with your budget projections. If in doubt, be conservative and overestimate your expenses and underestimate your revenues. It is particularly difficult if you are starting a new business and have no previous year’s budget figures to guide your estimates. In this case, it is typically much easier to estimate expenses than revenues. As the budget year progresses the estimates should be updated monthly with actual figures, enabling you to check the accuracy of your forecasts. Note that there often are radical differences between actual and projected revenues and expenses due to unforeseen business circumstances and/or changing business and economic cycles, such as:
Gaining or losing a major clientHaving to purchase or replace expensive equipmentAn increase in rentHiring employeesAn increase in competitionChanges in the tax code
Do I Need a Business Budget?
If you own a business, then you need a budget. A budget is an essential part of a business plan and is necessary for starting a new business. It plays an important role in determining your start-up and operating costs. Once your business is established, budgeting becomes a regular task that normally occurs on a quarterly or annual basis. Without a budget, you may not know how your business is performing.
Example of a Business Budget Template
A simple business budget template includes expenses common to most small businesses. You can use and modify a template as required to suit your own business, filling out your own information where applicable. Your completed budget might look something like this:
