A budget is the sum of the money allocated for a particular purpose and the summary of intended expenditures, along with the proposals for how to meet them. It is a financial plan for a defined period, often one year. It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. A budget helps a business to take finance related decisions wisely. It is much more than just financial numbers. Budgets for income/revenue and expenditures are prepared in advance and then compared with actual performance to establish any variance. Thus budgeting is the basis for all businesses success. It helps with both planning and control of the finances of the business.
HOW TO FORMULATE A BUSINESS BUDGET? :
1. The first step is to tally your income sources – In case of building a small business budget you need to figure out how much money your business is bringing in each month and from which sources. Tally all the sources to get a clear picture of your total monthly income.
2. Determine fixed costs – Fixed costs are those expenses that remain the same from month to month, like rent, certain utility costs, payroll costs, etc. Find out those expenses and add them together to derive your total fixed cost.
3. Include variable expenses – Variable expenses, by definition are those expenses, that change from month to month. At the end of each month, if you keep a track of your variable expenses, over time you will get an idea of how these expenses fluctuate with business performance and during certain months. This will help to make accurate financial projections and budget accordingly.
4. Predict one time expenditures – There are some expenses that occur only occasionally. For example getting a latest laptop. Anticipating these expenses and adding them to your budget can help you to set aside the necessary fund and thus save your business from a sudden financial burden. For the same reason, you should also add a buffer to cover any unplanned purchases or expenses.
5. Put it all together – On your business budget, tally your total income and your total expenses, as expected by you. Then compare actual cash flow to actual expenses incurred and thus determine your overal profitability.
THE IMPORTANCE OF BUDGETING :
Some of the importance of budgeting are discussed below :
• Make sound financial decisions : In many ways, a business budget is like a financial road map. It helps you to evaluate where your business finances currently stand and what you need to do, to hit your financial goals in future.
• Curbs excessive spending : Owners and managers will carefully incur the expenditures if there are spending limits and accountability on exceeding these limits. The importance of budeget lies in setting this limit.
• Enforces planning : One of the foremost benefits of budgeting is that it provides a discipline that brings planning to the forefront as a key managerial responsibility. It helps you to plan your long term and short term goals, measure the performance and pave the path to them.
• Encourages competitiveness : Budgeting encourages competitiveness among employees and provides incentive to those who perform efficiently. Employees who can manage the expenditure of a particular job within the budgeted fund, prove their efficiency to the management. It provides a yardstick that can be used to measure the performance of an individual/ department in an organisation.
• Causes less money stress and helps to save money : When you make a budget, you know how much money you have and where you are investing it. When you spend aimlessly, you go further and further into debt and that is very stressful. Budgeting allows you to take control of your money instead of it controlling you. Moreover, when you prepare your budget and track your spending, you will naturally find ways to save. You will be able to see how much you have left and will be able to save the extra.