Part of creating a business plan which results in organizational success is the creation of a sound budget. By having control over your finances from day one, you are setting your business up for sustainable profitability and reducing the challenges you will have to face as a business owner. But what exactly is a budget? More importantly, how do you create one?
A budget outlines the key financial information relevant to your business, including your incomes, expenses, loans and borrowings, and your long-term financial goals. The budget is the one thing which all business decisions will revolve around, as money is a significant determining factor towards the approval or rejection of several decisions, such as buying new equipment, setting up a mobile plan for your business or even buying office supplies—find information about affordable mobiles or office services online reviews before you make a purchase.
Thus, the budget is tantamount to creating financially sound decisions and can also help identify the shortfalls of the business. The budget helps management identify areas where costs need to be controlled and where revenues can be enhanced.
So, how does one develop a sound budget?
Identify your incomes
Firstly, you must identify the amount of money the business is bringing in on a regular basis. This can be done through tallying up sales figures in books of accounts or evening by tallying the totals obtained from sales invoices. Income can also be obtained through sources other than sales, such as rental income or even interest from a loan given. Ensure that when recording your income, all sources are accounted for and that all information is at accurate as possible.
Determine Fixed Costs
Fixed costs are those costs which are unavoidable and make up the largest portion of a business’ costs. These costs include those such as property rent, payroll costs, and even website hosting, and must be paid whether production is at a maximum or at absolute zero, thus their unavoidable nature. Therefore, the management must keep a record of which expenses fall under this unavoidable nature and have remained constant over the past months, regardless of business production.
Incorporate Variable Expenses
These expenses vary with the production level and, unlike fixed costs, can be reduced as they are usage-based. Examples include utilities such as electricity and water, shipping costs, and transport costs. These change regularly and can be controlled by the management, thus, are often used to manage costs when profitability is declining.
The last step once the relevant incomes and costs have been identified and calculated is to determine a time period wherein all of these occur. Once a monthly pattern is established, these figures can all be bought together to create a budget for any time period, whether it is a month or six months!
While to the inexperienced, this may seem like an unnecessary hassle, any seasoned businessman will be quick to assure you that a sound budget goes a long way in ensuring business growth, cost control, and sustainable profitability in the long-run.