The Importance of a Business Budget

business-budgetDo you know how much revenue your business takes in and how much your expenses come to in an average month? If you’re like many entrepreneurs, you may think you are too busy with the actual running of the business to worry about figures like these, but you could be missing out on a powerful management tool. In this article we introduce the concept of a business budget and explain how you can start to set one up.

What is a business budget?

Like a personal or household budget which records your average monthly expenses and allows you to plan your finances, a business budget lets you take a look at your revenue and costs – any money which flows into or out of your business. By calculating your costs and keeping an eye on your revenue, you’ll be in a better position to control the future of your business and ensure your success.

How to create a budget

Your business budget needs to answer two questions: “How much money did I make this month”, and “Where did it go?” To answer these two questions, a basic budget will need to contain the following information:

  • Fixed Costs – these include rental of premises, salaries, insurance policies, and any other monthly payment which stays the same.
  • Variable Costs – expenses such as phone bills, payments to suppliers, office equipment and stationery. These are payments which rise and fall each month, depending on the amount of business you do as well as other factors.
  • Revenue – Any source of income that your business receives is included in this category.

Using a spread sheet, you should create a column for each category and record your monthly revenue and expenses. To get a better idea of how your costs change from month to month, you may want to study your bank statement and company books over the past few months as well.

Once you have a good estimate of your monthly costs, you can add your fixed and variable costs together to calculate your total monthly costs. If you subtract this total from your revenue and get a positive answer, your cash flow is positive. If not, you’ll need to find ways of increasing revenue and cutting costs. In our next article, we provide some tips on using your budget for successful business planning.

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