What is a Budget? and what should it include?
A budget is an estimation of revenue and expenses over a specified period of time and is reviewed and evaluated periodically. Budgets can be used for business and personal use. Budgeting is important and helps you to keep track of how much you earn and spend.
A budget is basically a financial plan for a defined period, normally a year and is known to improve the success of financial endeavors. For businesses budgets are an integral part of running a business efficiently and effectively.
A budget helps you make key financial decisions including:
- Identifying where to cut spending or grow revenue – being able to identify areas where you can decrease your spending or increase your revenue, will help to increase your profitability.
- Get funding to grow your business – if you are planning on getting a business loan the bank may require a detailed budget that outlines your expenses and income.
The budget process starts by establishing assumptions, these relate to projected sales trends, cost trends and specific factors that may affect potential expenses are monitored. The sales budget is normally created first as expense budgets cannot be completed without knowing future cash flows. A cash flow forecast will help to create these budgets, which we looked at in last weeks article. Budgets are prepared for all departments, divisions and subsidiaries. Manufacturing entities often develop a separate budget for direct materials, labour and overheads.
Once you have completed your budgets these are all rolled into a master budget, which includes budgeted financial statements and cash flow forecasts.
There are two types of budgets – static and flexible. A static budget remains unchanged throughout the period of the budget, regardless of any changes that occur during the period. A flexible budget changes in relation to certain variables. The dollar amounts change based on sales levels or production levels etc.
Both types of budgets are useful for management as a static budget will evaluate the effectiveness of the original budgeting process, whereas a flexible budget provides deeper insight into business operations.
Every budget should include the following:
- Estimated revenue – the amount you expect from sales of goods or services.
- Fixed Costs – rent, insurance, bank fees, accounting fees, and equipment leases etc.
- Variable costs – expenses that change according to production or sales volumes
- One Off costs – costs that aren’t normal, software or migration costs, new equipment etc
- Cash flow – the money traveling in and out of your business.
- Profit – plan out how much profit you are going to make based on projected income and expenses. If profit isn’t what you expect consider raising prices etc
- A budget summary – Create an easy to read summary, your accounting software may do this for you.
For seasonal businesses budgeting can be extremely important as your business isn’t consistent each month, a budget will give you insights to predict future cash flow. Ecommerce business’s main budgeting factors will be freight, web design, product photography etc as you need to create the best online shopping experience for your customers.
There are quite a few spreadsheets for budgets available online a lot of which are free. I have also added on in the Resources section.
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