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Why Your Business Needs a Budget

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Why Your Business Needs a Budget
by christopherjanb

In business, you have to spend money to make money. But you should also learn to make a budget and stick to it, especially if you’re just starting out. Here’s why:

If you don’t have a budget, it’s very easy to run out of cash ( and if you run out of money, your business may be toast!)
You won’t know for sure if you are really making any money.
Just one unplanned purchase can mess up your cash flow for months.
Operating without a budget makes it harder for your business to grow consistently.
Creating a budget will pay off in the short-term and the long-term, helping you identify budget-busting items and spot downward or upward trends in your profits. Armed with a budget, you can actually plan ahead for your expenses and cut down on unpleasant surprises. In this article, you’ll learn:

The parts of a budget
How to figure a budget
How to analyze a budget
In the early days of my recruiting business, I relied on a budget from Day One. My partner and I knew to the penny how much money we had. We knew exactly what was owed to us and what we owed to others. We weighed every purchase decision against our budget.

For example, about three years into our startup, I was planning our first national convention. I needed the convention’s expenses to come in on budget or under budget, because we had zero money to be over budget. After the convention was over and we counted all of our income and expenses, I was $15 under budget. (Was I good, or what?!) Having that budget helped me stay disciplined while hosting a successful convention.

Now that I own five businesses, my financial picture is more complicated. I rely on my accounting department to give me monthly financials on all my companies, individually and combined. But learning to budget in those early days paid off, and helped me get where I am today.

What is a Budget?
A budget is simply a look at your estimated income and expenses for a certain time period. You can create a budget for a month, a quarter, or a year. A budget can help you control your spending and analyze your income.

The Anatomy of a Budget
A typical budget includes income, expenses and profit.

Your income consists of the sales from products and services, accounts receivable, and other sources of income.

Your expenses include everything you spend on your business: your utilities, supplies, payroll for your employees, insurance, marketing costs, travel expenses, etc.

Your profit is simply your income minus your expenses. You hope that your income will exceed your expenses and give you a healthy net profit.

How Do You Figure a Budget?
When you start planning a budget for your business, you will compare your expected expenses to your actual expenses, and the same for your income.

(My assumption is that you keep track of your business finances in some orderly fashion. If you use accounting software in your business, you can easily search your expense categories to find realistic dollar amounts for your actual expenses. If you are using a spreadsheet, this task may prove cumbersome, but not impossible.)

You may feel like you’re shooting in the dark when it comes to some of these numbers, but that’s okay: It will be an eye-opener! You can revisit the budget and adjust the numbers upward or downward as needed, and over time the picture of your business will become clearer.

A Sample Budget
Here’s an example of a budget for Kay’s Bakery. Her bakery generally has sales of about $6,000 per month, but Kay has recently launched a catering service to bring in some extra income. When she comes up with her budget numbers, she can count on a few reliable recurring expenses, such as her payroll for two part-time employees and the rent for her bakery. However, her utility and supply costs tend to vary somewhat from month to month.

Analyzing a Budget
The net profit for Kay’s Bakery seem to be right on target. However, she can look for ways to run her business more efficiently and profitably. Since her sales were slightly less favorable for the month, she may need to start advertising her bakery and her new catering service to keep bringing in that extra income.

Kay’s expenses were a bit less than expected for the month, with a variance of $38.55. However, while planning her next monthly budget, she may want to plan for higher utility costs, especially in the coming winter months. And since rising inflation is starting to hurt her purchasing power, she can be on the lookout for less costly suppliers, or negotiate discounts with her existing suppliers based on her excellent credit.

Conclusion
When you start using a budget, you may be surprised at what you learn about your spending habits. But recognize that some months will just naturally be better than others — people just may not be in the mood for donuts or shoes or whatever you are selling. However, learning the discipline of sticking to a budget will help you build a healthy, growing business for the long run.

Author information

Mike Kappel
President at Patriot Software, Inc.
Mike Kappel is a serial entrepreneur and president of Patriot Software, Inc., an online accounting and a payroll software company and one of five successful small businesses he has started in the last 28 years. Mike still enjoys the challenge of a start-up, and is passionate about supporting small business and helping others reach their goals. He shares his experiences in his blog, Small Business Expert. You can follow him on Twitter @MikeKappel and Google+.
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