Setting a Budget for Your Business
Budgeting for a business requires you to set specific goals and develop a plan to achieve them. A business budget is an integrated plan of action for your business — not simply slap-dashing together a few figures and then hoping you reach the desired results.
A good budget demands a fair amount of time and energy, for several reasons.
Modeling: Forecast the amount of cash your business will generate during the coming year in profits so that you can plan for other sources of cash flow you'll need. For example, if your forecast that your store will make $400,000 in profits over the next year, but it costs you $475,000 to pay employees (including yourself), rent the storefront, and pay your utilities and other operating expenses, you'll know that you'll need to find a way to generate that extra $75,000. Create a budget that provides a clear trail of how the sales and expenses of your business (money coming into and going out of your business) determine what assets and liabilities your business has (assets are the things owned by your business, while liabilities are what your business owes to others). Together, assets and liabilities create your business's cash flow from the general activities that run your business.
Budgeting requires good working models of making profit, financial condition (assets and liabilities), and cash flow. You can use these models to make strategic decisions and exercise control — and do better planning.
Planning: Budgeting forces you to create a definite and detailed financial plan for the coming period. To construct a budget, you have to establish explicit financial objectives for the coming year and identify exactly what has to be done to accomplish these financial objectives.
For example, let's say that on top of the normal operating expenses in your independent bookstore, you know that in the next year, you want to replace the carpeting and all the bookshelves. Setting a budget will help you make this goal attainable.
Control: Budgeting shouldn't put your employees in a financial straitjacket, but it can hold individual employees responsible for keeping the business on schedule in reaching its financial objectives.
Create budget targets (the amount that you plan to both earn and pay out for your business within a certain timeframe) as benchmarks against which you compare actual performance, you can closely monitor progress toward (or deviations from) the budget goals and timetable. You use a budget plan like a navigation chart to keep your business on course. Significant variations from the budget raise red flags, in which case you can determine that performance is off course or that the budget needs to be revised because of unexpected developments.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
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