A Simple Budget Planning Process for Your Small Business

Budget planning is important in order to run a successful businesssmall or big. An entrepreneur will take into consideration all anticipated incomes, expenditures, profits and future needs while planning a budget. A budget will show how thorough a business plan is while showing the inherent strengths and weaknesses and preventing costly mistakes.

A budget is a very effective tool to manage business finances. Comparing the actual results with the projected goals is an excellent way to constructively demonstrate where and what adjustments are needed to make the business more successful. Monthly comparisons will keep a business running smoothly.

Budget Concepts

Small business budgets may have varying line items, depending on the nature of the business - product based or service oriented. However, the most common concepts are:

  • Revenue
  • Costs
  • Profits

Revenue

The income you bring in for products that are sold or for services that are rendered is called revenue. All streams of revenue should be included and it is very important to correctly estimate it for easier calculation of expenses/costs to achieve the targeted growth.

Costs

There are two main kinds of expenses: direct and indirect. Some costs will be fixed costs, some variable and some semi-variable costs. All expenses must be included. It is important that you do not forget to include unexpected contingency expenses - like repair/repurchasing essential equipment. It is crucial to calculate the expenses accurately because it is the only way to determine the amount of revenue to cover the costs and still make a profit.

Profits

Profit is calculated after taxes are deducted. It should cover payment for your services as well as a return on the invested capital. If the business plan is well-planned and realistic, there should be a fair amount of profit right from the first year itself.

Tips

It is important to understand industry standards. If it is a new business, use the Internet or a market survey to figure out what could be the weekly revenue/expenses and the traffic patterns. For an existing business, use last year’s results. The return on investment (ROI) for the past year and expenses can give you an idea to know how much revenue needs to be generated this year to reach the goals/profits targeted.

The numbers should reflect the details of the business plan, allowing you to learn from the past mistakes and to search for alternatives to achieve the set goals. They can help you determine whether to cut down on operating expenses, or trim the overheads to control cost. Estimating the costs should be from actual facts and figures.

The budget planning process may look too much a task and a difficult preposition but it is a very important tool. There are a number of excellent software programs available in the market to help organize and calculate budgets. It is a good idea to make a customized budget to suit individual needs and enjoy the benefits of a successful budget planning process.

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