A Business Budget is a financial plan that enables a business to allocate sufficient funds to different sectors necessary for its operations.
A budgetary plan considers the available finances of the business based on its income and expenses to help create long-term and short-term financial goals. This is done with the help of a business budget template.
Budgetary planning plays a vital role in the operations of the business.
Budgetary planning enables a business to do the following:
- Plan and manage the use of business finances.
- Identify areas that require reductions in expenditures or injection of funding to ensure the business remains profitable.
- Enable a business to obtain funding from investors or other lending institutions by providing a detailed outline of the business.
- Project the revenue a business is likely to obtain.
- Allocate revenue for business operations.
- Budgets are used to ensure businesses come up with realistic long-term strategies that are sustainable and do not cause financial strain to the business.
Elements of an Ideal Business Budget
Budgetary planning can enable a business to maximize the use of its finances through the proper allocation of funds. It is therefore essential that the budget contains all the necessary components for it to function effectively.
The business budget must hence contain the following elements:
The estimated revenue is the earnings a business expects to make from the sales of its goods and services. Therefore, a business must consider including the estimated revenue during budgetary planning to help save time, effort, and money through proper allocation of funds. Information concerning estimated revenue made by a business can be obtained from last year’s sales or, in the case of a start-up, the industry average revenue. The number of sources of revenue a business will determine the amount of money coming into a business.
A freelance writing business with several sources of revenue such as freelance writing projects, writing courses offered on the freelancer’s website, and consultancy services for a writer can increase the revenue a business obtains.
Businesses can also have one source of revenue, such as a retail brick and mortar business.
Fixed costs are monthly recurring expenses in a business that can include rent, utilities, salaries, insurance, legal services, equipment leasing, and web hosting. For a business to ensure proper budgetary planning, it must incorporate all its fixed costs. Start-ups can use projected costs to come up with a rough estimate of their fixed costs during the budgetary planning process.
Variable costs are corporate expenses that change depending on the sales of a business. Variable costs can include production costs, inventory, travel costs, packaging and shipping costs, credit card fees, and usage-based utilities. Variable costs can have a significant effect on the profit margins of the business. It is therefore important that they be included in the small business budget planning process. A decrease in variable costs increases the profit margins, while an increase in variable costs decreases the profit margins.
One-off costs are expenses incurred less frequently compared to fixed costs and variable costs. One-off costs could include unplanned expenses, costs for fixing damaged hardware like computers, employing an IT consultant to deal with a security breach of data, updates on software used in the business, move-in costs, and equipment purchase. Businesses, especially small businesses, must ensure that they factor in one-off costs in the budget to prepare on how they can meet these expenses if they arise within the budget year.
Cash flow is the movement of money into and out of the business. Budgetary planning can be greatly affected by the business cash flow. A business cash flow can either be positive or negative. Positive cash flow ensures more money comes into the business and hence more can be allocated to the budget. A negative cash flow means that more money is going out of the business therefore it is likely to have a tight budget due to having less cash for allocation. Cash flow should be monitored on a weekly or monthly basis to ensure the business is in line with its financial goals.
Profit is the difference that remains after the deduction of expenses from the revenue. The business must ensure that it creates a profit statement to be incorporated into the budget during the budgetary planning process. The expected profit must be in line with the level of trade the business is functioning at.
Making a Business Budget (Step-by-Step Guide)
A well-formulated business budget can easily be monitored and managed to ensure the business’s ultimate success. Therefore, it is important that a business follows a well-outlined procedure to formulate an effective budget.
The following step-by-step guide should be used during the budgetary planning process:
Analyze the costs
First, the business must review its expenditure and divide it into fixed, variable, and semi-variable costs. Understanding the category of the different expenses placed will enable the business to identify where it can cut its costs to increase profit margins. Analyzing costs also allows a business to allocate sufficient funds to meet its needs. Allocation of insufficient funds can greatly affect the financial goals the business has set for itself.
Estimate business revenue
Secondly, the business should estimate the total revenue it makes from its sources. Analyses of the revenue earned by the business can help identify how much money can be borrowed to fill in the budget gaps. Well-estimated business revenue will help the business create a realistic budget. Overestimation of revenue often leads to over-borrowing, which then affects the next budget by increasing business expenses. A monthly, quarterly, and annual review of business revenue help ease the budgetary planning process.
Add the three types of costs together and make adjustments
Finally, a business should calculate and add the three total costs to come up with the total sum of expenditure of the budget for the year. The business can then consider adjusting the budget to meet its financial goals for the year. The budgetary planning process will enable the business to cut unnecessary costs and function within financially sustainable means.
Essential Considerations for Making the Budget
Creating an effective business budget requires the business to use its past data to develop reasonable projections for the budget. Keeping an effective accounting system can ease the budgetary planning process by providing all the information concerning the business’s financial state.
The past data should be used to create a target profit margin to be met by the budget. The target margin created during the budgetary planning process will often affect cash flow in the business. A large profit margin will result in positive cash flow for the business. Therefore, by using data from the previous year, one is able to identify key areas in the business that generate significant cash flow and can therefore budget or plan on improving on these key areas to ensure there is a high return on investment.
During small business budget planning, negotiations with suppliers should be initiated to yield discounts which can reduce the business expenditure. Holding negotiations is an indication of trust between the business and the supplier. When holding negotiations, a business should factor in the seasonal and industry trends. The high and low seasons experienced by a business can affect the budget by having it scaled up or down. During the low seasons, the supplier can provide a discount for the business, hence reducing operations costs.
The budgetary planning process will also be affected by the current position of the business. Already existing businesses have access to their financial data for the previous year’s enabling them to create a budget based on the information. Start-ups, on the other hand, can use estimated totals from market research to help project the revenue a business can generate.
Both start-ups and existing businesses can carry out market research for pricing determination during the budgetary planning process. Market research will help an existing business recalibrate its pricing while assisting a start-up to formulate its pricing for products or services.
When creating a budget, a business should also set its own spending goals. Setting spending goals ensures easy monitoring and accountability of the money allocated for operations. Suppose the allocation does not yield the expected results, then the business can reduce funding for operation in the next budget.
A well-crafted business budget template should contain all the necessary information for the business. A business can use different types of templates, including a small business budget template, a 12-month business budget template, a business budget template for multiple products, an annual business budget template, a business expense budget template, a professional business budget template, and a start-up budget template. These different types of templates can be used to meet various budgetary needs for a business.
Business templates fasten the process of creating a budget such that one does not have to create the budget from scratch. By outlining all the contents that should appear in a budget, templates ensure one captures all the relevant information that is needed to carry out effective budgeting.
Businesses use business budget templates to increase their efficiency. The increased efficiency eases their workload and reduces the stress brought about by budget planning. The pre-formatted designs offered by business budget templates also simplify the budget planning process. The simplicity benefits businesses by helping them keep their finances on track.
A business budget template also benefits businesses by enabling them to be consistent with the information they write in their budget. Consistency ensures that businesses that use the template annually, weekly or monthly are able to compare their progress from prior information. Businesses are therefore able to identify any areas that have led to increased or reduced spending.
Following are some free downloadable templates for you:
Frequently Asked Questions
What are business budget templates?
A business budget template is a tool used to make calculations of the expenses and revenue from the operations of a business to create a budget. The information on revenue and expenditure written in a template visually depicts the business’s financial state.