Diane Helentjaris, 2024, via Unsplash
Budgeting can help you attend to the aspects of your company that you need to improve and work towards your strategic business goals. In this article, you’ll learn how to create a basic business budget in four simple steps. Want to know how to do it? Keep reading for more.
Step 1: Assess Your Costs
In the beginning, when creating your budget, it’s important to conduct research on the operating costs of your company. Understanding this will give you the basic know-how required to produce a spending plan that will work.
Let’s say you draft an estimated budget and then figure out down the road that you require extra cash for your company’s activities, you’ll potentially bring a negative impact on your targets. You need to set up your budget in a way that ensures your profit and revenue account for expenses. You need to appropriately estimate and project.
The budget you’ve set should include variable, fixed, and one-off expenses. For example, fixed costs could be mortgages, rent, internet, and insurance, whereas variable costs could include the price of goods sold as well as labor costs.
It’s fine to overestimate the expenses you’ll accrue as you’ll require the right amount of money to deal with other expenses later. If you’ve set up a new business, start-up expenses are important to consider, too. Running your business like this will help you ward off unexpected financial issues.
Step 2: Roughly Determine Your Revenue
There are plenty of companies that have failed due to exaggeratedly high revenue projections, resulting in the need to borrow more money than originally anticipated to fund operations. This misses the whole point of setting a budget in the first place. Being sure to be pragmatic and keeping track of previous value helps to appropriately anticipate revenue amounts. Companies should always monitor revenue from a monthly to a yearly basis.
Last year’s revenue can help you project your revenue for the next year to come. It’s imperative that the estimate be grounded in reality. Then, you can create achievable targets that will in turn help your company grow.
Step 3: Gain Insight Into Your Gross Profit Margin
Your gross profit margin is the money you’ve got left over when your company has addressed all of the costs of goods sold (COGS) at the close of the year, as opposed to the net profit margin that also subtracts other expenses. Understanding margins allows you to gain a deeper knowledge of your company's finances. Let’s take a look at an example where this knowledge comes in handy while setting a budget.
Say, your company’s revenue was $4,000,000, yet you’ve accrued debts. At the closing of the year your costs exceed your revenue (which can be detrimental and impact both your growth and your viability long term). You’ll find here that you must recognize the costs that aren’t positively affecting the company and get rid of them. To this end, you need to make a list of all of the prices of the goods you’ve sold for every material and subtract them from the overall revenue in sales. This data is required so that you can clearly see the success of your company, helping you boost profit and lower your expenses.
Step 4: Give Yourself Spending Targets
Creating a budget isn’t just about adding your expenses and taking away your earnings. How smart you are with spending your cash will determine the level of your company’s success. When you set targets, you can focus on the right areas for spending your cash, without running into any unexpected costs.
An example is if you’re overspending cash on stationery that doesn’t end up being used for the purposes of marketing or operations, it might be the right move to cut these expenses. This cash can be more effectively used for marketing campaigns that generate more leads, sales, and profit. It’s important to make investments that are advantageous to your business long-term.
Conclusion
With budgeting, your company can ensure it focuses on keeping spending and income in balance so that you’ve got more money to play with. Then, you can see the parts of your company that you want to focus on making thrive. Here, you’ve learned about tips for creating a basic business budget to benefit your business. You can read more in this Zoho.com article. Good luck taking ownership of your financial future!
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