How to create an effective business budget + Template
Creating an effective business budget is a crucial aspect of managing a successful business. A budget helps you track and manage expenses, forecast revenue, and make informed decisions about investments and growth strategies.
In this article, we will provide a comprehensive guide on how to create an effective business budget, covering the essential steps and strategies for creating a budget that is tailored to your business’s unique needs and goals and a free business budget template. By following these steps, you can ensure that your business is on a solid financial footing, with a clear plan for achieving your objectives and staying competitive in your industry.
Let’s start by looking at the examples below:
Company A
Has a total of 10 million in the business account and does not plan for its financial commitments or goals for the year. Disburses funds at any time and has no financial projection fof the year.
Company B
Has the same amount, however, meets with its department heads and financial team to plan for the year. Makes financial projection based on their financial history, determines what needs funds should be allocated to and saves some money for unexpected expenses.
The difference between both companies is the essence of this article- Business Budget.
Before we dive right into it, let’s define a business budget
What is a business budget?
A business budget is the spending plan for your business based on your income and expenses. It can also be defined as the financial roadmap for your business plan. A business budget typically includes a list of expected revenue sources, such as sales, investments, or loans, and anticipated expenses, including fixed costs such as rent, salaries, and utilities, as well as variable costs like marketing and advertising expenses. Creating a business budget involves analysing past financial records and market trends to estimate expected income and expenses for the upcoming year. It is essential to set realistic financial goals and prioritise spending to ensure that resources are allocated appropriately.
Now that you know what a business budget is, here are five ways it benefits your business.
Become a pro at making decisions
It is easier to make better decisions during a budgeting session due to the information presented. These decisions could include whether or not to increase salaries, which aspects of the business should receive more funds allocation, which current financial commitments should be paused/postponed, and so on. It allows businesses to evaluate the potential return on investment (ROI) for different projects or initiatives which helps them identify the most profitable ventures, and enables the business to invest its resources more wisely.
Monitor the financial health of your company
Budgeting provides an overview of your company’s operations and essential cash flow, sales, and profit information. It also helps businesses to set financial goals, which provides a clear target for the business to work towards. Comparing your budget yearly is also an important way to track your company’s performance.
Manage cash flow more effectively
Consider having control over your finances in such a way that you can plan for and achieve your objectives. Isn’t that amazing? A budget also allows you to allocate appropriate resources to projects, ensuring that your business objectives are met and that it remains profitable and successful.
Plan for the future
A budget aids in the creation of financial stability, not only for the short-term but also for long-term goals. It assists you in determining how much money you have now, how much you will need in the future, and what decisions must be made to meet your business objectives. It also helps to forecast future financial performance based on current trends and data. This enables businesses to make better decisions about future investments, staffing needs, and inventory management.
Improves Accountability
A budget creates accountability within an organisation, as it requires stakeholders to report on their progress towards achieving the financial goals set out in the budget. This ensures that everyone is working towards the same objective, provides a means of monitoring progress and making adjustments as necessary.
Prepare for financial emergencies.
Regardless of how well you plan, you never know what can happen in the course of doing business. A budget allows you to anticipate and plan. This way, you always have a safety net for emergencies.
How to create a business budget
Determine your company’s revenue
Revenue is the amount you earn from the sale of goods or services. Regardless of your income sources, make sure to account for any and all income that flows into your business—then total all of those sources to gain insight into your monthly income.
Calculate your expenses
The next step is calculating what goes out of your account daily, monthly or yearly. These expenses can be grouped into two-
Fixed expenses: These are those expenses that remain constant within your budget. For example- rent, utility bills, salaries etc.
Variable expenses: These are expenses that change as the quality of the goods/services a business produces changes. Examples are raw materials, package supplies, labour etc.
Set your financial goals
Once you get an overview of your business’s financial health, you can set your financial goals accordingly. If you have a budget surplus, you can investigate what part of your business generates the most revenue and invest more funds in it. Whereas, if you are running a deficit, your goal should be to cut overhead costs and spend only on what is necessary.
Variance analysis
Creating a budget is useless unless you review it by tracking your progress (variance analysis), that is, comparing budgeted versus actual. To meet your goals, make sure you properly document your income and expenses and try as much as possible to stick to the budget you’ve already created. Documenting your finances is simple with tools like Google Spreadsheets and Microsoft Excel.
Click here to download your free operational budget
Conclusion
As previously stated, a business budget serves as the financial roadmap for your business plan. This means that the importance of a budget in carrying out your business plan cannot be overstated. Consider the company’s plans, goals, and essential needs as you conduct the budgeting session. Your in-house financial controller and management team are capable of creating an adequate budget for the company.
We have created a business budget template for you to use. Click here to download your free template.
