What is a Budget for a Business?
What is a business budget? Why your business needs to budget
What is a Budget and why does a business need one?
A budget is a financial document used to project future income and expenses. The budgeting process may be carried out by individuals or by companies to estimate whether the person/company can continue to operate with its projected income and expenses.
Why Does My Business Need a Budget?
In the midst of starting and running your business, you may wonder why you need to stop and put together a budget. Just as for personal budgets, a business budget is a vital tool to success in starting and operating a business. A properly prepared and updated business budget serves several purposes:
- Plan Start-up Needs for Your Business Plan. The first and probably the most-used purpose of a budget is to help you gather information for a business plan, including all the items and expenses necessary for start-up. You need to know what it will cost you to open your doors the first day of your business. This includes inventory, furniture and fixtures, computers and software, and, of course, the costs of finding and securing a location for your business.
- Get a Business Loan. After a business is up and running, there are still times when you will need your budget and other financial spreadsheets to get a business loan. You will probably need to borrow money from a lender or from family and friends for start-up. A budget shows your lender how much you need for start-up and what your cash flow situation will look like in the first three years of your business. A reasonable budget can increase your credibility with your lender.
- Plan Your Spending. Your budget can give you information about how much you can spend each month and how much you can take out of your business as a salary or draw to live on. As you start out, you may not be able to take much, but you can see what the future looks like and you can plan for your living expenses as you get started.
- Know Your Required Profit. If you set up your budget on a "required profit" basis, you can see how much money you need to make to meet all your expenses, including personal expenses. A required profit budget starts with all the expenses you need to pay each month, leaving the required profit as the income number needed to make the budget balance.
How Do I Create a Budget for My Business?
The process for preparing a monthly budget for your business includes:
- Listing of all sources of monthly income, including sales and interest
- Listing of all required, fixed expenses, like rent/mortgage, utilities, phone
- Listing of other possible and variable expenses.
- Creating columns for actual and budgeted income and expenses, so you can see how the budget works out in real time.
Creating a Startup Budget
The budget process for an existing business is different from a business startup budget. An existing business will have a history of sales and expenses and it isn't difficult to look back and determine average costs and sales for months and years.
The startup budget, on the other hand, has no historical data, so assumptions must be made and pro rated (projected) in to the future. This article provides a step-by-step process for creating a business startup budget.
The budget creation process works the same way for both personal and business budgets. First, you will need to review your income sources, then your expenditures.
More Information on Business Budgets
What are Some Tools I Can Use to Create and Maintain a Budget?