Why Budgeting Is Important
Creating a budget for your business, whether it’s yearly, quarterly or monthly is essential, especially if you want to see how well you’re business is doing financially. Creating a budget in advance will enable you to compare actuals versus predictions within your budget.
Having the capability of comparing actuals versus budgeted predictions allows you to make adjustments to your budget accordingly. For example if you’ve budgeted $1,000 for office supplies for the entire year and once the year is over you’ve spend $2,000, you’re over-budget on those office supplies. On the other hand, if you’ve only spent $500 on office supplies for the entire year, you’re well under-budget.
So why is this so important? Probably the biggest reason is cash flow and how well you’re managing your cash—because as we all know, cash is king in the business world if you want to stay open and profitable. If you seek investors or loans from private banks or from government agencies like an SBA loan, one of the first things they will look at is a history of how well you handled your cash flow. They will also ask you to make cash flow projections for upcoming years, so it’s important to have a handle on learning how to make a business budget and then compare those expenses to actual spending.
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Free Forms for Creating the Business Budget
First off, in our Media Gallery, you’ll find two helpful business budget templates:
- Cash Flow Budget Template – In this Microsoft Excel budget template, you can enter what you expect to spend on each expense item for a particular period (the template is a month to month budgeting tool).
- Actual Vs. Budget Template – In this Microsoft Excel actual versus budget template, you can compare predictions to your initial business budget to what was actually spent on each expense item.
Once you’ve downloaded these free budgeting template tools, it’s time to dig in and create your business budget.
Tips on Preparing a Business Budget
If you have an existing business, preparing a business budget will be easy as you can start by looking at actual expenses and using those figures to create a budget. For new business owners with no spending history, you need to do some research for each expense line item. Follow these tips to help you prepare the most accurate budget you can:
- Simple Math – Some items, like payroll can be determined using simple math. Since you know what you’ll be paying employees, just multiply that number by the budget period. Simply take all the wages for every pay period that will fall within the budget time and multiply. For example if you have two pay periods in one month and your budget time period is one month, multiply the pay period amounts by two and enter that into your budget. You can use the same method for other predetermined expense items like business insurance, rent, loans, mortgage payments, and even officer salaries.
- Research – Some items you may have to research. Items like utilities, for example. Call the gas and electric companies and see what the average utilities were for the building where you business sits and use that as a starting point. For your telephone budget, discuss with your business telephone carrier how much it will cost for your base service including all your phone lines, fax lines, Internet, and charges for long distance calls. Once you have your base cost, try to determine how much money you expect to spend on top of that base cost including long distance calling based on number of telephone lines or Internet usage.
- Estimate – On other items like office supplies, maintenance, and professional fees you may have to guesstimate and then after one month or quarter is over, compare your guesstimates to actuals to see if you need to adjust your business budget.
- Compare – If you have a friendly competitor who is willing to assist you, ask them what their average costs are on vendor supplies, inventory, along with other expenses and utilize those numbers as a starting point.
- Ask the Experts – Utilize some of the many helpful tools from either the Small Business Administration (SBA) or SCORE, a division of the SBA that is geared toward guiding new small business owners.
The most essential part of your business budget is follow up. This means you must compare predictions to actuals to set the budget for the next period and so on. If you utilize the free business budget templates found in our Media Gallery, you’ll find it much easier to prepare that first budget and quickly master the budgeting world.
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