Budgeting Basics

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A budget is a structured financial plan for your business. It identifies available capital, estimates your spending, and helps predict incoming revenue over a specified period, usually monthly, quarterly, or yearly. It provides a benchmark for long-term financial goals and is, therefore, as important for a small business as for a large corporation.

The following are steps that any business can take to create and maintain a budget that contributes to financial success:

  1. List all sources of income and expenses based on business costs and earnings in previous budgeting periods. If you don’t have historical data available, start with the standard costs of a business in your industry and adjust those depending on your business’s unique needs. Account for all income and assign that income to go toward a specific category of expenses. This will help to decrease the likelihood that the business will spend more money than it should. Some costs that a business should budget include payroll, rent, utilities, materials, insurance, professional services, advertising and marketing costs, and any debt obligations. Make sure to include recurring expenses as well as any anticipated one-time expenses that will have a substantial impact on the budget.
  2. While it is important to keep track of spending, budgets are there to show you the big picture of how your income is being allocated. A budget that details how each dollar should be spent can limit the ability to be flexible in meeting the needs of the business. Whether you decide to keep track of your expenses by project, department, or in one master budget, categorize expenses so trends in spending are easy to identify.
  3. Use an automated budgeting tool to enter the financial details of your budget. Consider using a software program that goes beyond just Microsoft Excel or other spreadsheet programs. When looking for a budgeting software program, look for features that allow you to create budgets by department, job, or profit center and combine them all into one master budget. This will improve the accuracy and efficiency of your budget reporting. In addition, the program should allow you to see actual versus budgeted amounts on a line-by-line basis. These features will improve the accuracy and efficiency of your budget reporting.
  4. If you work as part of a team, share the budget with the rest of the members and ask for feedback on ways it could be improved. Communicating the budget and having your team members understand where and how funds are being allocated increases accountability across the business and ensures that everyone is invested in the business’s financial success. Consider looking at the budget at the end of every month. That is the time to compare it to actual numbers and see how your business performs. Make revisions as needed to maintain an accurate financial picture of your business.

While there are many reasons why budgets are essential to the success of a business, one of the primary and most critical is the ability to monitor cash flow. Cash flow is what allows a business to maintain day-to-day operations. A good budget will help you track all the money going in and out of the business. Doing so will enable you to align expenses with incoming revenue and use your cash resources strategically.

Because budgeting is such an important part of business operations, failing to prepare and regularly review your budget can result in potential risks for your business, including:

  • Not having an emergency fund for unanticipated expenses
  • An inability to expand operations or expand into new markets
  • Not being able to secure investment dollars to put back into your business
  • Not making long-term commitments to customers, vendors, or suppliers, thereby straining business relationships
  • An inability to make large purchases that are necessary for the business

In summary, budgeting is critical to business success. It helps businesses track cash flow, plan for growth, prepare for emergencies, identify inefficiencies, and make informed business decisions. A good budget requires careful planning, goal-setting, and financial analysis to maintain a business that is both operationally healthy and sustainable for the long term.

Dana Rogers is the controller for the National Wood Flooring Association (NWFA) in St. Louis, Missouri. She can be reached at dana.rogers@nwfa.org.

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