The Fundamentals of a Business Budget
A business budget is one of the essential tools in managing your business finances and actively building your business.
A budget shows what you plan to do with your cash over the next year.
For a complete picture of your business health, you need to review the profit and loss statement, the balance sheet, the cash flow forecast and the budget. Taken together, these reports allow you to make informed business decisions and monitor performance.
Why have a Budget?
- Forecast sales and expenses according to monthly or quarterly variations.
- Evaluate performance over time, including changes or patterns.
- Understand where you’re spending money and where you’re earning it.
- Set clear goals and use your budget to stay on track and reach them.
- Checking the difference between what you planned to spend and what you actually spent helps you spot issues early and prepare for surprise expenses.
- A budget helps you focus on the big picture and keeps you motivated over time.
Where to start
A basic budget starts with your income and expenses by estimating when money will come in and when it will be spent. It’s all about tracking cash flow.
As you get better at budgeting, you can create a more detailed version that includes things like depreciation and future costs.
Some businesses will start with one budget but may move to having three budgets:
- Business as usual – the next year’s budget is based on current year income and expenses, with perhaps a small adjustment for consumer price index increases.
- Worst case – budget is based on a pessimistic view of next year’s performance.
- Best case – budget is based on an optimistic view of performance over the next year.
A budget is usually for a financial year, but you can also set up budgets for two to five years.
Once you’ve got a budget in place, you can regularly compare your financial reports to it to see how things are going. This helps you make smart decisions on the spot and tweak your plan as needed.
What Next?
Now’s the perfect moment to set up a budget for the new financial year. Schedule a session with us, and we’ll help you create a useful budget in your accounting software. This way, you can use it to actively manage your business, plan strategically, and achieve your goals.
