What is a Budget for a Business?

Clutch did a survey and found that 61% of small businesses do not have a formal budget. If you don’t have a budget, you might not know how well your business is doing.

Making a budget helps you figure out how much money you have, how much you have spent, and how much you will need in the future. A budget can help a business make important decisions, like whether to cut costs, hire more people, or buy new equipment. The funding can help you change your business plan or decide what to spend money on if you don’t have enough money.

With the right budgeting plan, you can keep your business from going into debt or find ways to get it out of debt. A detailed budget can even be used to get a loan from a bank or other financial institution for a business. This becomes a proof of your accountability and your ability to make sound decisions.

Here I will teach you why a business budget is essential, what makes a reasonable budget, and the different kinds of budgets.

Kindly follow this link if you want to read about personal budgeting and not business budgeting

So, what is a budget for a business?

A business budget is a plan for how your business will spend its money based on how much it makes and how much it spends. It tells you how much money you have, how much you will spend, and how much you will make.

A budget can help you organize your business activities and help you set financial goals. It can help you deal with problems in the short term and plan for the long term.

There are many kinds of budgets.

Most of the time, your final budget comprises parts from several other budgets made at a departmental level. Let’s look at the different kinds of budgets and how they help create a business plan.

1. Master budget

A master budget is made up of all the smaller budgets that are made by the different parts of an organization. It uses the financial plan, the cash forecast, and the financial statements as inputs. Master budgets help management teams plan the tasks they need to do to reach their business goals. In larger companies, the senior management is in charge of making several versions of the master budget before deciding on the final one. Once it has been looked over for the last time, funds can be put toward certain business activities.

Smaller businesses often use spreadsheets to make their master budgets, but replacing the spreadsheets with good budgeting software usually cuts down on mistakes.

2. Operating budget

A business’s operating budget shows how much money it expects to make and how much it expects to spend over a specific period. It’s a lot like a report of profits and losses. It includes fixed, variable, capital, and non-operating expenses. Even though this budget report is a high-level summary, each line item has relevant details to back it up. This information can be used to see if the business is spending the way it planned.

Most of the time, the management makes this budget at the beginning of each year. The document is updated every month or three months throughout the year and can be used to predict what will happen in the following years.

3. Budget in cash

A cash flow budget gives you an idea of how much money will come into or leave a business during a specific period. Cash budgets are made by organizations based on sales forecasts, production, and estimates of what they owe and what they are due.

The information in this budget can help you decide if you have enough cash on hand to run your business, if your money is being put to good use, and if you are on track to make a profit.

4. Budget for money

The budget helps businesses figure out how much money they’ll need. It also tells when they’ll need it to meet their short-term and long-term needs. It considers assets, liabilities, and stakeholders’ equity, the most important parts of a balance sheet and tells you how healthy your business is.

5. Labor budget

A labor budget will be necessary for any business that needs to hire people to reach its goals. It helps you figure out how many people you’ll need to reach your goals so you can plan the payroll for them all. It not only helps you plan for regular staffing. But it also helps you figure out how much to spend on seasonal workers.

6. A fixed budget

As the name suggests, this budget estimates how much money will come in and how much will go out over a year. No matter if sales go up or down, the line items in this budget can be used as goals to reach. Most nonprofits, educational institutions, and government agencies that have been given a fixed amount to use for their activities in each area make static budgets.

What goes into a budget for a business

If you’re starting a new business, making your first budget might be challenging. But it’s an excellent way to learn and figure out what works best for your company. The best place to start is to learn about the parts of your budget. To start your budget, you may first need to make a few assumptions.

1. Expected income

This is how much money you think your business will make by selling goods and services. The estimated revenue comprises two main parts: the sales forecast and the estimated cost of the goods sold or services. If your business has been around for more than a year, you can use your experience to figure out how much these things cost. If your business is new, you can look at how much money similar businesses in your area make. So you can use that information to make conservative estimates of your own. But whether your business is new or old, it’s essential to keep things in perspective and not overestimate.

2. Fixed cost

A fixed cost is an expense that your business pays the same amount for over and over again. Some fixed costs are building rent, mortgage and utility payments, employee salaries, internet service, accounting services, and insurance premiums. Including these costs in the budget is essential. This way you can set aside the exact amount of money needed to cover them. They can also be an excellent place to look for problems if the money side of your business isn’t going as planned.

3. Variable costs

This category includes the cost of goods or services whose price can change depending on how well your business does. For example, you have a product on the market that is getting increasingly popular. The next thing you want to do is make more of that product. When you increase production, the costs of the raw materials, the distribution channels, and the production labour will change. Because of this, all of these costs are considered variable expenses.

4. One-time expenses

These are one-time costs that your business may have to pay in any given year. Some of these costs would be buying a laptop or replacing broken furniture.

Since it’s hard to know what these costs will be, there’s no sure way to estimate them. But to be ready, it’s wise to put some money aside for this category.

5. Flow of money

This is the money coming into and going out of the business. You can get an idea of it from your financial records from the past. And use that information to estimate how much money you will make in the coming year. Not only should you pay attention to how much money is coming in, but also when it is coming in. If your business has a busy and a slow season, knowing when your cash flow is highest will help you plan. It would also help you know when to make big purchases or investments.

6. Money

The last part of a budget is profit.The number you get when you subtract your estimated costs from your estimated income. If your business is making more money, that’s a good sign of growing. Once you have a good idea of how much money you will make in a year, you can decide how much to put into each part of your business. For instance, will you invest your profit in advertising or marketing to attract more customers?

What is a budget for a small business? Conclusion

A business budget is like a road map. It helps you predict cash flow, determines which parts of your business need improvement, and run your business smoothly. Because of this, successful businesses spend a lot of time and energy making realistic budgets. This is because they are an excellent way to track how well the business is meeting its goals. Creating a budget can be challenging for new businesses. This is because they don’t have any previous numbers to use as a guide. However, if you look at how your competitors are doing and know what goes into a budget, you can finish your first budget and have a good road map for future budgets.

If you want a better breakdown on what a budget it click here.