By Analytix Editorial Team
Sound financial management starts with a strong budget. For a small business, a budget is the single largest influencing factors for a number of decisions, including business operations and expansion. There are a number of reasons you need a business budget in place:
> To know at a glance, how much money you have for business and operations-related expenses, including business expansion
> To prove credit-worthiness to investors or lenders
Tip #1. Understanding the business objectives
What industry do you belong to and what is the nature of your business? Your budget depends on the goals you establish for your business. If you own a small business, you need to consider several factors:
> Infrastructure requirements, including office space, computer systems, manpower resources, and other expenses such as potential hiring costs
> Expenses for business development activities, including marketing and promotional efforts
> Time and cost expenses for research and planning, including attending events
> For production industries, a calculation of costs associated with procuring raw materials may also be necessary
Tip #2. Review your existing financial status
Check your existing balance sheet and income statements. Take into account your income tax returns and cash flow statements. If you have already incurred expenses towards the business, such as earmarking office premises or purchasing equipment, costs towards these can serve as useful benchmarks for initiating the budget development process.
Furthermore, investigate the tax liabilities for your business. Begin with the IRS website – a useful starting point for understanding tax allocation. Accordingly, budget for setting aside some amount of money, based on average estimates.
Tip #3. Outline the expected costs
Look for historical data on work or services performed by businesses with similar goals and objectives. This can include cost estimates. On your spreadsheet, carefully note approximate costs for each of your objectives and business goals. If you have reliable past data, use it as a starting point for extrapolating and creating estimates that are affected by inflation or appreciation. Ideally, create annual estimates that can be broken into monthly estimates, if needed. Remember, if you are taking into consideration long-term investment expenses, then an annual estimate proves better.
Tip #4. Define the budget for costs
Now that you have estimated costs, establish an upper limit for the same expenses. Ideally, put your data on two or three different Excel sheets so that you can access it easily. If you spot patterns, such as an increase or decrease in annual costs, note this and use it as the basis for your budget allocation to account for appreciation or depreciation. To start, your figures can closely match those of the historical data you possess. Specific changes can be made as you progress.
Tip #5. Review your budget
At the beginning, your budget ideally should be reviewed on a daily or weekly basis, depending on the type of business you operate. As a clearer trend emerges, you can further define costs, instead of working around estimates. A working budget maintains enough flexibility to accommodate for new entries on a daily basis, if required. For example, if your business involves daily sales, you will benefit from reviewing them on a daily or at least weekly basis. This will assist in developing more realistic estimates and allocations for specific functions.
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