Written By @oyinnlola
You have to figure out how to spend money before you can make it. Yes, you got that right. It is just the same as saying “Failing to plan is planning to fail”. A budget is a plan to control your finances. It is an unpleasant experience to run out of cash and fall short of payments. You want to be sure that you can meet your current goals, and plan for future ones as well.
Budgeting is the most effective way to ensure your business has a future. It allows you to control your cash-flow and make provisions for larger costs, and helps to know the right time to invest or expand. It is necessary to know how much and where your budget is allocated at all times in order to stay in control of your expenditure.
A budget can be designed to be weekly, monthly, quarterly or annual. There should be at least a general budget that captures projected expenses and sales revenues. A new business is likely to spend more than it earns and become insolvent without a good budget.
The major components of a budget should include Income, Expenses, Profit (see resources for more components of a budget)
This is one of the two main components of a budget or better still a budget’s “cornerstone.” The estimates should be made to be as accurate as possible while being conservative. Try to do some market research and benchmarking if you are not sure. You could also use knowledge gained from a previous job.
This is the second main component of a budget. You will have to come up with figures that will show how much it will cost your business to earn the income. You might need to brainstorm to ensure that all costs to be incurred are factored in. This is easier if you have financials for a previous year.
Expenses can be divided into these categories:
- Fixed Costs: These are costs that you can’t easily change from month to month such as rent, insurance premium, loan payment or lease. They remain the same whether or not your sales rise or fall.
- Variable costs correlate with sales volumes. You will be more likely to be able to cut variable expenses if you’re short on cash, because many of these are discretionary. Classify recurring variable expenses you can’t easily cut, such as utilities, phone bills or labor, differently than variable expenses you can’t modify, so you can quickly find places to cut when the need arises.
- Semi-variable costs are fixed costs that are variable when influenced by volume of business. These can include salaries, telecommunications, and advertising.
The truth is you are in business to make profits.
Target your sales and profits. You estimate this figure by subtracting your costs from your revenues. This information will drive the rest of your estimates for costs, expenses, and capital expenditures. For a startup business, begin by estimating what type of realistic profit you’d like to see in the coming year. You could also use your previous year financials if you have been in business for a while. Consider the economy or the loss of a major customer when doing this.
You can also troubleshoot your projected costs and see where you can cut if your profit projections aren’t up to what you want.
The budget should operate according to basic mathematical equations — either “sales = total cost + profit” or “sales – total cost = profit.”
The basic tenet of budgeting is that the figures will never turn out to be exactly right.
Take time to readjust figures. Remember that most of what has been done is estimates. You will most likely go back and readjust your estimates to reach your profit targets.
Factor in adjusted costs and/or savings as required. It is important that realistic figures are used so that the budget can guide your business as accurately as possible.
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Start Up Budget
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Please see resources below for more information: