What Is Business Budget Planning?
Business budget planning is a method for forecasting future inflows and outflows. Simply speaking, it is setting up a plan for business spending to ensure that it does not exceed business income and the venture can realize a profit. Beyond this very basic motive, business budget planning is also used to effectively allocate money to certain defined objectives and in this way, it can help in the process of goal setting. Planning a business budget can also play an important role in improving performance (if the business has staff members) because monetary rewards can be allocated for stellar performances, but this can only be done if there is a fair idea of how much funds are likely to be available.
Therefore, business budget planning is extremely important for every entrepreneur.
How to Get Started in Business Budget Planning
Now that it is clear that business budget planning is an integral part of every entrepreneur’s tool kit, it is time to take a look at how the process is actually achieved.
1. Decide How Often You Will Track Your Budget
If you wait too long to document your actual income and expenses, the task can get overwhelming and if it is done sporadically it becomes very difficult to use the results to make your predictions because you may not have information for comparable periods. This is why it is better to decide upfront how often you will track your money flows and then commit to getting it done. Most entrepreneurs are advised to plug in the figures for their income and expenses on a weekly basis, although actually trying to draw comparisons and make decisions on changes in processes as a result of the budget information can be done once a month. As the business grows, you may be able to defer making changes or actively tracking performance to once per quarter as the business starts to operate partially on auto-pilot.
2. Set Up a Process to Track Income and Expenses
You will have different types of expenses and need to find ways to track them. Some expenses are tied to the amount you produce or how much work gets done, these are called variable costs and they must be entered using actual receipts. However, every business also has some fixed costs and these are those expenses where the category (but not actual costs) stays the same regardless of how much you produce or sell. Examples of fixed costs are rent, electricity and other utilities. Your income should be entered from your sales and this has to be closely tracked, especially if you also make sales on credit. Credit sales need to be uniformly recorded either when the sale is made or when cash is collected.
3. Forecast Your Future Inflows and Outflows
Every entrepreneur must use the business budget planning process to forecast future inflows and outflows, otherwise known as cash flows. This is done by looking at income for comparable periods, especially for seasonal businesses, and also by looking at the expense side of the equation. When coming up with a forecast, certain adjustments must also be made. A forecast can reflect goals. If for instance, you would like to increase sales by 10% in the next two months, your forecast can reflect this. However, your goal must be realistic so there should be an upward trend that indicates this may be possible or you should have plans for increase spending on advertising to make this happen.
4. Monitor the Gap Between Your Predicted Figures & Actual Performance
Finally, you need to keep a watchful eye on your actual and predicted performance. If your predicted budget inflows are constantly higher than your actual performance then you may need to check that your predictions are realistic or find ways to achieve your goals. Similarly, if your actual spending constantly outstrips what you planned to spend, more stringent measures need to be put in place.
Business budget planning helps the entrepreneur effectively achieve their plans by giving them a solid financial basis from which to make decisions.
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