Key Budgeting Concepts
Budgeting forces you to plan how to use your assets wisely to generate revenue. (Assets are resources, including cash, buildings, machinery, office equipment, and anything else your businesses uses to conduct business.) As you develop your budget, keep the following key concepts in mind:
Depreciation: Long-term assets, such as trucks and machinery, depreciate; that is, they wear out and are worth a little less every day as you use them up. You need to budget for operating costs and depreciation, so you have sufficient cash to replace these assets when they’re used up or no longer useful.
Milk all the revenue you can from an asset before disposing of it, unless maintenance of that asset exceeds the cost of replacing it or a newer model would improve efficiency to the point of at least paying for itself.
Opportunity cost: When you use an asset to manufacture product A, you give up the opportunity to use that asset to produce product B, which would have generated revenue, too. When developing a budget, consider opportunity cost, and make choices on how to use assets that minimize these costs.
Cash flow: When you conduct business, cash flows through your business. It flows in as revenue and flows out as expenses. One of your primary goals when developing a budget is to make sure you have at least as much cash flowing in as you do flowing out.