Exercising financial discipline is MUST for all business enterprises, big or small. Along with your business plan, the budget that you draw up will help you make important decisions. We will share the various aspects of budgeting in a two-series article.
In the first part, we will tell you about the ‘whats’, ‘whys’ of budgeting while in the second part, we will guide you on how to create a budget and how you should refer to it. Getting started, here are the ‘what’, ‘whys’ of budgeting.
WHAT is a budget?
In basic terms, a budget estimates both your revenue and expenses for a particular period, generally for 12 months called the ‘financial year’. It shows how you can plan to allocate your resources in the future. Revenue comes from sales in the normal course of business.
It is also referred to as ‘Turnover’. Expenses are what you pay out for materials, rent, utilities, payroll, marketing, and other fixed and variable costs. It is a good practice to have one composite budget which is for the entire financial year and twelve-monthly budgets with itemized, granular details.
WHY you need a budget?
• Plan the Start: The first purpose of a budget is to help you gather information for your business plan, including all the items and expenses necessary for a start-up. You need to know what it will cost you to open your doors on the first day of your business. This includes inventory, furniture and fixtures, computers and software, and, of course, the costs of finding and securing a location for your business.
• Plan the Future: In order to stay a going-concern, you need to know your spends on marketing, expansion, etc. With a well-thought-out budget, you will know how to use your revenue judiciously to achieve business goals. What’s more!!! It will also give you visibility of an impending expense in the next financial period and help you provide for it.
• Plan the Cash-Flow: Budgets help to assess the cash-flow situation of your business by keeping a tab on your cash inflows and outflows. This way you can avoid cash shortage problems. You can also find out if your customers are paying you back too late and decide on the credit period policy.
• Plan the Loans: In case you have to turn to banks or other lenders for your capital requirements, they will want to examine your budget before they agree to give you a loan, amongst other documents and files. Sound budgetary practices help in such situations too.
HOW OFTEN should I budget?
As mentioned in the beginning, almost all budgets are based on a company’s financial year. Most businesses create a monthly, quarterly or semi-annual budget which gives a more detailed view of your company’s finances. A number of experts suggest that a monthly budget is most useful for staying on track. ‘Unpleasant’ surprises can be kept in a bay with a good budget. Therefore, Happy Budgeting !!!