Budgeting is like painting a picture of the current and future situation of a business. Unless there is workable a budget, a small business or an established entity may not be able to provide a snapshot of their working capital, cash flows and future earning potential. Before making money, it is important to provide for a business plan, and drafting a budget is the potential key to a successful business. This tool can help understand business expenses, the way costs are distributed, and how profits will be used or reinvested in the business. It is a roadmap that needs to be charted and provided to investors. A budget is also a quick way to secure a business line of credit in minutes.
Budgeting works on experience and discipline. To increase effectiveness and efficiency, there is a need to understand the basics of how the budgeting process starts,
- List down your income and expenses first. They are important ways to assess working capital loan requirements.
- Use a budgeting template that is available online, or make your own to help list down the costs and their explanations. Much digital accounting software such as Xero and QuickBooks provide hundreds of templates to choose from. A working capital template can also be helpful.
Components of a Successful Budget
A successful budgeting process will include the use of cost centers and a proper understanding of the business. The startup costs, the number of employees and their salaries, the revenues that will be generated, and the profits should all be written in a comprehensive manner. Another critical component is the time frame used. Time frame helps assess if small business funding can be repaid or sought. Many budgets are usually annual, or semi-annual. These annual budgets are compared with actual and forecasted budgets. Financial software can automatically include columns that help in making meaningful comparisons. As per the SBA, the following components should be present in any budgeting process:
- Sales and Revenues that highlight future sales, a number of units to be sold, and any inflation predicted. The best estimator of potential sales is looking at either industry averages if the business is new, or past year sales.
- Total Costs includes expense, depreciation charge, interest payments, small business loan interests, and possible revenue of capital expenditure that will be needed to help produce products and services. A small component of working capital is always added to provide for the payment of usual yearly expense and is returned back to the business at the end of the year.
- Fixed and Variable Costs are usually seen as a component for production and inventory use. These need careful appropriations because they can fluctuate with an increase and decrease in production numbers.
- Net Present value is the single most important part as it provides inflation-adjusted profit assessment for future projects and sees a return on small business loans. Projects with positive NPV or IRR are usually undertaken over others.
Budgeting as said is an art and is like painting a picture of your own future. Be wise.