Most business owners start their business with a lot of passion, but they can’t carry out their plans effectively unless they have a proper budget. A lack of budget can result in unnecessary expenditures on project implementation, leading to a loss or even the failure of the business. Being preoccupied with day-to-day business operations frequently results in an inaccurate assessment of the overall financial situation. That is why financially skilled entrepreneurs create budgets and analyze them on a regular basis.
A budget helps keep the overall financial position of the business clear and prevents unnecessary expenses. In addition, the budget also makes it easier to introduce necessary adjustments in the implementation of the project. The general impression about the budget is that it is made to control expenses. While budgeting for income is just as important as spending, the revenue budget provides a target that stimulates efforts to increase sales.
The Benefits of Budgeting
- A budget helps management to make better or more informed decisions and exercise greater control over the financial affairs of a business.
- A budget is helpful in preventing unnecessary spending, controlling over-expenditures, checking pilferage, and focusing on necessary expenses.
- The regular budget review focuses on development issues that are vital for growth and prosperity.
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A Budget Review
The budget review allows you to assess the performance of your company. Furthermore, it is simpler to provide resources for development expenditures that are required for future development. Budgeting allows businesses to focus on cash flow management and cost reduction. The budget contributes to the company’s success. It aids in the planning and control of the company’s financial affairs. When there is no financial control, there is no benefit to the plan, and the business fails.
How to Make a Budget in 7 Steps
- The first step is to determine the time duration for which you are going to make a budget.
- In the second stage, review the sources of income of the business and finalize what are/will be the sources of income/revenue.
- Determine the expected revenue from the sources identified above in the third step. It should be based on facts while also indicating a suitable target so that maximum effort can be made to achieve it.
- Now add the projected income from all sources. This shows the target. In the next step, you’ll determine the expected cost and expenses to be incurred for earning the targeted amount of revenue.
- Divide the cost into two parts, namely, fixed cost and variable cost. Fixed expenses are those that the business has to bear, whether it may or may not have production and sales. Such costs are building rent or insurance expenses etc. Variable expenses refer to expenses that increase or decrease with business activity, such as the purchase of raw materials and utility expenses, etc.
- Make a realistic estimate of all necessary expenses and prepare a list. There are two things to keep in mind. First and foremost, personal and family expenses are not included in this list. The second factor is the time span of the estimates, which should be the same for both revenue and expense.
- Now subtract the total estimated expenses from the projected income and determine the projected profit. By this stage, your simple business budget will be ready.
Keep the budget papers safe, and compare actual income realized and expenses incurred with the budget on a regular basis. Continue to make decisions as needed to meet the revenue and profit target set in the budget. Draw or ask for a budget variance report at least monthly and take corrective actions in case of deviations.
It can be difficult to budget your business and make accurate estimates. However, if some time and effort are put into it, the financial insights gained from the entire business budget can aid in better decision-making, financial control, and growth focus.
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