Budgeting for Business
Several different types of budgets are often used to create a final budget. Here is a look at what some of these budgets are and what kind of information they can provide.
Cash Budget
A cash budget estimates the volume of money that either comes into the business as revenue or leaves the business as expenses. A cash budget can help you to create sales forecasts and production costs. They also help estimate payables and receivables.
Financial Budget
This type of budget helps you to better understand how much capital you will need and when. This is useful at times when short-term and long-term needs arise. An example would be the addition of a seasonal product or the expansion of a long-term new product coming into inventory.
Labour Budget
If your business is growing and you need to hire more staff, you will need a labour budget. It will give you data that will help to determine how many new hires you require to reach your business goals. It will assist you in planning their payroll requirements.
Master Budget
This is the result of the combination of all other budgets put together to create a single, master budget. It relies on different business components including the business financial plan and cash forecast. The master budget is the framework that all budgeting will come from.
Operating Budget
The projected revenues and expenses for your business make up the foundation of an operating budget. It will factor in fixed and variable costs, capital costs, and non-operational expenses. This budget is updated frequently to keep it current throughout a business year.
Static Budget
This budget outlines revenue and expenses that are fixed throughout the year. Static budgets are not common in small businesses but are usually vital in the non-profit sector where a fixed amount of money has been granted or provided to cover key expenses or activities.
The Components of A Budget
There are several parts to a budget. Here is a simple breakdown of what they are.
Cash Flow
This outlines the amount of money that comes into and leaves the business. It is not only important to know these numbers, but it also helps to know when revenues and costs peak annually so that you can prepare for these events long before they happen.
Estimated Revenue
This is the volume of money you expect to see coming into your business. The two factors that impact this figure are sales forecasts and the estimated cost of the goods sold or services rendered. Realistic goals also work better than over-estimating revenues.
One-Time Expenses
There are times when an unexpected cost comes out of the blue. Maybe the furnace breaks down and requires replacement or you need to purchase new computers. These are examples of one-time expenses that are not expected to be ongoing costs for any length of time.
Fixed Cost
If there is an expense that costs the same each month, such as rent, utilities, and wages, it is considered a fixed cost. Having these figures factored into a budget helps you to set aside the right amount of revenue monthly so that you can cover these costs.
Profit
This is the number you arrive at when you subtract your cost estimates from your projected revenue. If the profit total increases over time, this shows that your business is growing, and that’s the kind of math result all small business owners like to see.
Variable Costs
These are the costs that are not fixed and can change in value from month to month or season to season depending on outside factors beyond your control. It is important to have variable costs in your budget because numbers do change and you must be ready for this.
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Conclusion
A budget gives you a framework for what your business is doing for sales and revenue. It helps you prepare for expenses, shows you profits, and gives you data to support any financial decision you need to make. If you have a business, you need a budget.