Chew on the word “budgeting” and it’s going to taste more sour than sweet. No one wants to be on a budget anymore than being on a diet. Wouldn’t it be great if we could spend (and eat!) as if calories and dollars were unlimited and consequences were zero? We can fantasize all we want but the reality is in the math and even the most successful of businesses need a budget (or a diet).

Why Your Business Needs A Budget

You’re making money, have employees and your receivables are more than payables. What more can any business owner ask? A lot, actually. The bottom line on why to draft a budget for your business is that it will help you determine exactly how much money you have and what you need to bring in to meet business goals.

But there are other reasons, too. Bankers and other financiers may want to see a budget when you ask for a loan. Employees should also be privy to the budget so that they understand where the business is going and are motivated to work harder. If everyone knows what the goal of the company is, everyone will know what they’re working towards.

Understand What A Budget Really Is

A budget sounds hard but all it does is serve as a tool for making better spending decisions and  identifying areas for improvement. Mindset is everything when creating a budget. Negativity will bring about diminished results whereas a positive mindset will reveal helpful directions.

Having a budget gives your business a direction and provides targets for growth. It also offers the opportunity to stand back and review your performance and the factors affecting your business.

There are also different types of budgets. You might determine it’s better to budget on the accrual basis to estimate net income or focus on budgeting for cash flow.

Components Of A Budget

Budgeting for your business is all about making an educated guess as to how the future of your business’s finances will look. It requires examining what happened last month, what happened three months ago, and what this month last year looked like—then using that information to make wise financial decisions for the months and years ahead.

When working out your budget you should include your actual revenues, costs, and profits or cash flow so you know if you have any money left over for capital improvements or expenses. A budget should be tabulated annually and divided into 12 months, with blank columns next to your estimates with space to fill in with your actual results as the year progresses.

Drafting A Business Budget

The budgeting process starts with looking at your past income and expenses. The longer you’ve been in business, the easier this process will be, as you’ll have more data to examine when creating your forward-looking budget. Look at:

  • Revenue
  • Fixed cost
  • Expenses
  • Contingency fund
  • Projections

Following these guidelines will get your business in a position to spend wisely.