Business Budget Essentials – Preparation and Review
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NOTE: scroll down to the end of this article to download a complimentary excel file including a budget template for you to use
What is a business budget?
Much like a personal budget or a household budget, a budget for business keeps track of income and costs. Every budget should be broken down into three general categories: revenue, expenses, and profit. Although budgets can be set up in many different ways, every budget should follow the same basic formula of:
Revenue – Expenses = Profits
The revenue and expense categories can be broken down into more specific subcategories. In the revenue category, you may want to see revenue for specific product lines or specific store locations. Total those revenue subcategories to calculate an overall revenue figure.
Expenses are typically broken down to a very specific level. Expenses are generally split between fixed and variable costs. Fixed costs are costs that don’t change with sales volume and include things like rent, utilities, and insurance. Variable costs change with sale volume and include things like the cost of goods, labor, and shipping.
The budget should also have two columns next to each category and subcategory. One is for projections. The second is for actual results. This allows you to compare the two numbers for insight into how your business is performing.
Why is a business budget important?
The most important reason to have a budget is to gain a deeper understanding of your business. A budget can tell you whether your business’s revenues are meeting projections, if costs are getting out of hand and which expenses need to be reigned in. Running a business without a budget is akin to taking a long road trip without a map or GPS.
A budget is also important for conveying your business’s performance to others. Lenders may want to see your budget to get an idea of how well you control costs and whether your operations are profitable. Having an updated budget also shows lenders and investors that you possess a certain level of organization and competence as a business manager and make you more trustworthy in their eyes.
How often should a business budget be reviewed?
While creating a budget is a good first step, the budget itself is meaningless if you don’t review it on a regular basis. Most business experts recommend reviewing the budget on a monthly basis. Doing it any more frequently may not provide you with enough information to make informed decisions.
When reviewing the budget, look for areas where the actual results differ significantly from the projections. You may need to reassess whether your projections are realistic or make operational changes in the business in future months.
Also be sure to ask yourself why there were significant differences. It may be that your business had a large, one-time expense in a given month. However, if you consistently run over budget in the same category every month, it might be time to examine that area and make cost reductions. That could mean cutting hours for employees, reducing marketing expenses, or buying less inventory.
Reviewing the budget regularly will allow you to make these changes before they become serious problems. If you don’t have a budget, you may not realize that you need to cut back on certain costs until it’s too late. At that point, you may have few options to remedy the situation.
For business owners, information is the key to making informed decisions. A business plan can provide the foundation for what your business is and how it should be run. A budget will give you insight as to whether you’re managing the business to your expectations and projections.
Here is a complimentary excel file including a budget template for you to use: