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.