How to Create a Realistic Budget for Your Business
Without a well-structured budget, business owners may struggle to establish clear goals, forecast sales revenue, monitor spending, track their companies' progress, and make informed money-related decisions. A budget is a financial roadmap that helps business owners with these and many other tasks. In this Ameris Bank blog article, you will learn about the various types of budgets and how to create one with realistic goals and objectives.
Before explaining how to create a realistic business budget, we want to ease any concerns about developing a budget or improving one you already have. Although creating a budget seems like a time-intensive task requiring lots of financial paperwork and manual data entry, it is much simpler than you may believe.
You can choose from many different software programs that can assist you in creating a business budget. Most software programs have user-friendly interfaces and step-by-step instructions for inputting financial data. Moreover, these programs streamline most areas of the budgeting process and allow you to export reports.
A software program is the preferred method for creating and maintaining a business budget, but you can also use a budgeting spreadsheet. Just remember that spreadsheets require more manual work and can only be accessed from one computer or device unless they are set up for sharing.
Once your budget is complete, the majority of the work is done. You just need to monitor your budget and make necessary adjustments and additions, which we will discuss later in this article.
There are several types of business budgets to select from depending on your specific needs and goals, and you can always use more than one type. For instance, you might implement a master budget, which includes all of your business's finances and forecasts, along with a labor budget, which lists the costs to produce and deliver your business's products or services.
Here are five common types of business budgets. If you have questions or need assistance choosing a budget type or the right mix of budget types, it will be beneficial to consult a business accountant.
Master Budget - This all-encompassing budget includes operational and financial statements, each with sub-budget categories. It shows how much a business spends and expects to earn in a specific period (e.g., fiscal year, calendar year).
Operating Budget - This budget focuses on the day-to-day costs necessary for running the business. It includes expenses related to production, inventory, and overhead.
Cash Budget - This budget tracks and forecasts the money that flows in and out of a business over a specific period. It helps ensure a business maintains enough cash to meet its operational expenses and other financial obligations.
Financial Budget - This budget forecasts sales revenue and business expenses and shows the business owner how much cash is required to cover short-term and long-term costs.
Labor Budget - This budget breaks down payroll costs required to run a business effectively and produce and deliver its products or services. It helps the business owner determine how many full-time and/or part-time employees are needed.
Once you decide on a budget type and a method to create a budget—through software or a spreadsheet—it's time to collect your business's financial documents. This includes your income statement, expense report, balance sheet, and cash flow statement.
These documents will give you a well-rounded view of your company's financial situation for a given period, and you can refer to them when creating your budget.
Before adding your business's financial data to your budget, it is important to review it for accuracy. Review all figures—revenues, expenses, profits, and losses—and cross-check account balances to confirm that everything matches your financial statements. You should also check your balance sheet to gain insight into your business's liabilities, assets, and equity.
Once you finish these steps, you can begin inputting the data into the required sections in your budget. The main sections in a business budget typically include the following:
Upon completion, review your budget's line items to ensure nothing has been overlooked.
Once all the data has been entered into your budgeting software or spreadsheet, you can analyze your business's financial situation and past performance for a quarter or year. This information is vital when setting future goals and projections based on revenue growth, profit margins, operating expenses, and other key performance indicators (KPIs).
Your goals and projections need to be realistic and attainable. You and your employees may fall short if your goals and projections are overly ambitious and seem out of reach. This can lead to frustration and burnout, ultimately affecting productivity and morale.
So, make a point to establish targets that can be achieved. This will foster a motivating workplace where everyone—including you—feels motivated to work diligently and succeed.
Creating a business budget is not a one-time task where you input financial data and set it aside only to check it once a year. A budget is a constantly evolving financial plan that needs to be revisited monthly, quarterly, and annually.
Regularly monitoring sales revenue, expenses, and other budget line items is essential as the weeks and months progress, as any changes can impact your budgetary needs. For example, shifts in sales revenue, unexpected costs, or supply chain issues can alter your income projections. These shifts can disrupt your business's budget and require adjusting your forecasts and budget allocations.
When revising your business's budget, use the same practices as when you created it. Your updated goals and projections should be based on the factors impacting your budget. As you make adjustments, ensure that your new financial projections are realistic.
A business budget holds tremendous value when built on accurate, up-to-date figures from past business performance. So, make a point to maintain error-free accounting records throughout the year and refer to them when reviewing or modifying your budget.
Keeping accurate income statements, balance sheets, and cash flow statements simplifies business budgeting and helps you set realistic goals. It can also save you time when preparing your business taxes and minimize the risk of errors on your tax return.
We hope you achieve success when creating and managing your business's budget. Explore our business blog for additional insights and practical tips for small business owners.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Creating a Budget is Not a Complicated Task
Before explaining how to create a realistic business budget, we want to ease any concerns about developing a budget or improving one you already have. Although creating a budget seems like a time-intensive task requiring lots of financial paperwork and manual data entry, it is much simpler than you may believe.You can choose from many different software programs that can assist you in creating a business budget. Most software programs have user-friendly interfaces and step-by-step instructions for inputting financial data. Moreover, these programs streamline most areas of the budgeting process and allow you to export reports.
A software program is the preferred method for creating and maintaining a business budget, but you can also use a budgeting spreadsheet. Just remember that spreadsheets require more manual work and can only be accessed from one computer or device unless they are set up for sharing.
Once your budget is complete, the majority of the work is done. You just need to monitor your budget and make necessary adjustments and additions, which we will discuss later in this article.
Select a Type of Business Budget
There are several types of business budgets to select from depending on your specific needs and goals, and you can always use more than one type. For instance, you might implement a master budget, which includes all of your business's finances and forecasts, along with a labor budget, which lists the costs to produce and deliver your business's products or services.Here are five common types of business budgets. If you have questions or need assistance choosing a budget type or the right mix of budget types, it will be beneficial to consult a business accountant.
Master Budget - This all-encompassing budget includes operational and financial statements, each with sub-budget categories. It shows how much a business spends and expects to earn in a specific period (e.g., fiscal year, calendar year).
Operating Budget - This budget focuses on the day-to-day costs necessary for running the business. It includes expenses related to production, inventory, and overhead.
Cash Budget - This budget tracks and forecasts the money that flows in and out of a business over a specific period. It helps ensure a business maintains enough cash to meet its operational expenses and other financial obligations.
Financial Budget - This budget forecasts sales revenue and business expenses and shows the business owner how much cash is required to cover short-term and long-term costs.
Labor Budget - This budget breaks down payroll costs required to run a business effectively and produce and deliver its products or services. It helps the business owner determine how many full-time and/or part-time employees are needed.
Collect Your Business's Financial Documents
Once you decide on a budget type and a method to create a budget—through software or a spreadsheet—it's time to collect your business's financial documents. This includes your income statement, expense report, balance sheet, and cash flow statement.These documents will give you a well-rounded view of your company's financial situation for a given period, and you can refer to them when creating your budget.
Analyze the Numbers and Input the Data
Before adding your business's financial data to your budget, it is important to review it for accuracy. Review all figures—revenues, expenses, profits, and losses—and cross-check account balances to confirm that everything matches your financial statements. You should also check your balance sheet to gain insight into your business's liabilities, assets, and equity.Once you finish these steps, you can begin inputting the data into the required sections in your budget. The main sections in a business budget typically include the following:
- Revenue - income from sales and income from interest
- Operating Expenses - employee payroll, office/facility rent, utilities, insurance, office supplies, cost of goods sold (COGS)
- Assets - equipment, machinery, technology, business vehicles, property improvements
- Cash on Hand - money in business savings or business checking accounts, short-term assets that can be liquidated into cash
Upon completion, review your budget's line items to ensure nothing has been overlooked.
Set Realistic Goals and Projections
Once all the data has been entered into your budgeting software or spreadsheet, you can analyze your business's financial situation and past performance for a quarter or year. This information is vital when setting future goals and projections based on revenue growth, profit margins, operating expenses, and other key performance indicators (KPIs).Your goals and projections need to be realistic and attainable. You and your employees may fall short if your goals and projections are overly ambitious and seem out of reach. This can lead to frustration and burnout, ultimately affecting productivity and morale.
So, make a point to establish targets that can be achieved. This will foster a motivating workplace where everyone—including you—feels motivated to work diligently and succeed.
Make Revisions and Improvements to Your Budget
Creating a business budget is not a one-time task where you input financial data and set it aside only to check it once a year. A budget is a constantly evolving financial plan that needs to be revisited monthly, quarterly, and annually.Regularly monitoring sales revenue, expenses, and other budget line items is essential as the weeks and months progress, as any changes can impact your budgetary needs. For example, shifts in sales revenue, unexpected costs, or supply chain issues can alter your income projections. These shifts can disrupt your business's budget and require adjusting your forecasts and budget allocations.
When revising your business's budget, use the same practices as when you created it. Your updated goals and projections should be based on the factors impacting your budget. As you make adjustments, ensure that your new financial projections are realistic.
Maintain Accurate Accounting Records
A business budget holds tremendous value when built on accurate, up-to-date figures from past business performance. So, make a point to maintain error-free accounting records throughout the year and refer to them when reviewing or modifying your budget.Keeping accurate income statements, balance sheets, and cash flow statements simplifies business budgeting and helps you set realistic goals. It can also save you time when preparing your business taxes and minimize the risk of errors on your tax return.
We hope you achieve success when creating and managing your business's budget. Explore our business blog for additional insights and practical tips for small business owners.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.