A budget is a spending plan created to keep a check on finances. For households, a budget plan helps separate spending from saving and provides an estimate of the overall monthly income. For businesses, drafting budgets does more than just determining how much is being spent and saved. It provides the organization with a clear vision of their current financial position and a guideline for the future management of funds. Moreover, it helps reduce the risk associated with running a large organization.
Elements of a business budget
- A budget should clearly mention the business costs and revenues.
- It should also include the annual business profits or the annual cash flow so that it can be determined how much finances are left over for capital expenses.
- It should be created with a time frame in mind or else comparisons for improvement would not be possible. If not monthly, a business budget must be made at least yearly.
- It is wise to create a budget with the help of professional accountants or a business financial software rather than to haphazardly write one down. Finances are not to be taken lightly!
How to outline a business budget plan?
An organization wanting to sketch a budget for itself can do so by following the steps given below.
Choose a budget style/ format
Budgets have normally been drafted manually i.e. on paper, but with so many technological advancements, it is now possible to make use of a spreadsheet software to create a budget. Seeking professional help is always a good idea.
Determine a target for profit margin
For an organization, the profit margin is equal to its estimated revenues minus its expenses. Setting a target for profit margin is important. It acts as a goal for the organization to strive towards. Of course, it is advisable to set such targets with the help of a financial advisor, keeping in mind your business operation in question.
Specify fixed costs
Fixed costs are those that do not vary throughout the year such as rent, property taxes, and insurance. Add up all such costs. If previous financial data exists, past fixed costs can be used easily by adjusting them for any increments in bills.
Estimate variable and semi-variable costs
Variable costs vary throughout the year and mainly include the cost of inventory and raw materials. Semi-variable costs have both a fixed and a variable component. When all such costs have been estimated, they should be added up.
Add all costs
Once all types of costs have been estimated, they should be added together. Their total would form the cost base for the year. Now check whether this amount is greater than or less than revenues and whether it helps achieve the target profit margin. If it happens to be less than revenues, thus rendering the profit margin target unachievable, the business should look into ways of cutting down these expenses.