A budget is a living, breathing predictor of your business’s financial position and goals. It works as a roadmap for increased profits. At its simplest, a budget projects future sales, costs, profits and cash flow. Budgets can drive company growth; help you analyze performance and make necessary changes based on a comparison of budget vs actual; and, help your team understand the financial outcomes of their work and plan for improvements.
Business budgets help you:
- Ensure you are planning for financial growth. Profit doesn’t just happen, it’s planned for.
- Make business decisions such as hiring new staff, buying assets or equipment.
- Guestimate cash flow so you know whether you can meet expenses and fund new projects.
- Monitor a team’s performance and motivate them to reach targets.
- Monitor cash flow before it becomes a problem.
- Assess seasonal peaks and valleys so they can be planned for.
Why Make a Budget? Budgets Help Prevent Failure
Budgets are enormously important to the operation of your business; not only do they help you manage your costs, but they also help you determine whether you profit goals are within reach and keep you on the right road from month-to-month — SBA, How to Build and Use a Business Budget That’s Useful All Year Long
Though it’s difficult to estimate the number of freelance businesses and small businesses that operate without a budget, if you look at business failure rate statistics, you might extrapolate that many businesses operate without one. While small business failure rates are frequently quoted, reasons for those failures are not often provided. When Statistic Brain Research Institute published its business failure rates by industry stats, they also published some revealing statistics about the causes of those failures.
According to those statistics, the number one cause of failure was incompetence – mostly financial incompetence which included: emotional pricing, living too high off the business, no knowledge of pricing, lack of planning, no knowledge of financing, and no experience record keeping. A business budget forces you to pay attention to all of those aspects of your business.
We at Flare believe budgeting is so important, we made it a central feature of our accounting software for small business. Knowing that budgeting is vital to financial success, we created a business budgeting feature that don’t need to be an accountant to use.
What to Include in a Budget
The basics of a budget are quite simple. They include projected revenue, expenses (both fixed, variable and one-time costs) and profit. Projected profit is the result of a simple calculation: Revenue – Expenses = Profit. If you’ve operated in previous years, closing actuals from financial statements are a good place to start the current year’s budget. If you are a new business, your first year’s projections will have to be best guestimates. Whether your business is new or existing, projections should be realistic.
These projections, of course, will be compared with actual revenue, expenses and profit. If your projections seem completely out of line with actual revenue and expense, either your business’s financial performance isn’t measuring up, or your budget projections were unrealistic.
An Example Business Budget
The following budget is taken from Flare’s budgeting, but a budget spreadsheet would include similar revenue and expense items.
Basics of a budget would include (as shown above) the following:
- Revenue (this could be broken down in to Sales Revenue, Business Revenue, Product Revenue)
- Cost of Goods SoldNotice that Gross Profit is calculated by subtracting Cost of Goods Sold from Revenue.
- Operating Expenses, for example:
- Sales and Marketing
- General and Administrative
- Tax and Licenses
Notice that Operating Profit is calculated by subtracting Operating Expenses from Gross Profit.
If you do have prior operations, your past year’s actual performance will be adjusted for planned growth and become the current year’s budget. In Flare, you could run a Budget Report or Profit and Loss Statement to get the previous year’s actuals.
Flareapps.com small business tip #025Create a Business Budget with a Free Budgeting Template
To begin budgeting, you need a good template. There’s no need to reinvent the wheel though. There are quite a few business budgeting templates online. Check out these free Excel budget templates as a place to start. Of course, if you are using Flare accounting, it comes with a live budgeting feature that you can also export as Excel or CSV, or print and PDF.
- Budgeting in a Small Service Firm from SCORE.
SCORE is the largest network of free business information and mentorship. SCORE has chapters in most major cities in the USA.
- Vertex42 free small business budget templates
Vertex42 has nicely designed Business Budget and 12-Month Business Budget spreadsheets that are downloadable and free to use within your company (with some licensing restrictions). The 12-month business budget is also available as a Google Docs spreadsheet.
- PDFConverter.com includes several business budgeting Excel templates in its post 15 Excel Templates for Small Business Budget Management. Small business budgets include: business budget template, rolling business budget and forecast template, startup budget template and many others.