Budgeting is essential for operating a successful business. While learning the ins and outs of creating a working budget may seem intimidating, it doesn't have to be. Budgets are simply informed estimates about how much your organization will bring in through sales and other activities, and how much you expect to spend during a predetermined period. Most companies prepare annual budgets, but quarterly reports can be valuable when your business is growing and expanding.
How Do Budget Reports Support Growth & Profitability?
Budget reports provide a working guide that informs spending and investing decisions for a specific period in the future.
Planning For Expansion
An informed business budget considers past spending habits and revenue-generating patterns to project future profit or loss. Business leaders increase or reduce line items based on economic conditions and market trends that mean costs make go up or sales volume may change during the coming year. Armed with this information, business owners can explore saving opportunities to fund growth or establish capital reserve accounts.
- Preventing Unnecessary Spending
- Sticking to the budget, ensures you find ways to improve supply chain efficiency and reduce impulse buying.
Budget reports allow business leaders to monitor progress and prioritize financial goals when setting prices, replenishing inventory, creating marketing campaigns, and allocating funds for new equipment purchases.
Flexibility & Agility Driven By Budget Reports
Economic fluctuations and market trends dramatically impact how much an organization must spend and how much revenue can realistically be generated. Modifying the working budget can help you maximize revenue potential based on real-world conditions, at a predefined point in time. This flexibility is essential for supporting strong financial health.
Allocating Resources Wisely
When it comes to managing money wisely, a budget gives a clear, concise view of where a business has been, and what it will look like in the future. Budget reports are the perfect tool to inform resource allocation.
What Items Are Included In A Business Budget?
Most company decision-makers spend a good part of their day involved in activities focused on money matters. Right now, managing money probably consumes more of your time than you want it to. Creating a company budget frees you up to spend more time growing your business. Why? Because when you follow a thoughtfully created roadmap, you don't have to constantly check your bank account balances or shift funds from one account to another to cover recurring expenses or unplanned purchases.
So, let's look at what items a typical business budget includes. The Big Categories are income-generating items and expenditures. We'll start with revenue.
Revenue Budget Items
Income items include estimated earnings based on last year's income, or market trends and expectations if you manage a start-up without a track record. You might include:
- Sales projections, for a start-up, or last year's sales with an increase based on current trends or marketing campaign stats from your back office data bank, if you run an established company
- Interest earned from saving accounts, CD's and non-customer accounts receivable items
- Customer payments on revolving accounts
- Capital raised through fund-raising or new investor activities
- One-off income-producing sales, such as selling equipment or other assets
Expense Budget Items
Expense items are unique to each business, but almost all business entities have some general categories in common, like the ones below.
Utilities, mortgage, and lease payments are examples of fixed costs. Costs may increase year-over-year so, it is wise to contact service providers for assistance estimating future costs.
Other fixed costs include:
- Legal fees should include both retainers and as-needed costs. Your legal advisor can help you estimate annual expenses based on the previous year or industry averages.
- Accounting and tax services may include general bookkeeping if you use an outside vendor for these activities.
- Payroll costs include wages, taxes, and cost of benefit packages. Vacation pay, training, recruiting, sick leave, performance bonuses, and raises also fall under payroll expenses.
- Insurance costs include health insurance, worker's compensation, inventory coverage, vehicle insurance, and business income coverage, general liability insurance, and commercial property insurance. You may need specific riders for your business, consult your insurance provider while forecasting next year's spend.
- Bank fees include monthly service fees, cost of paper statement fees, overdraft protection fees, and per-item charges for each transaction.
- Loan servicing costs are liabilities associated with paying down debt and may include both principal and interest.
- Equipment lease payments cover items such as furnishing, equipment, plant fixtures, and office equipment.
Variable Cost Budget Items
Variable costs are usually tied to production or sales volume. They are costs of goods sales items that may include inventory, manufacturing costs, travel expenses, and shipping costs. A comprehensive budget helps an organization control cost of sales more effectively.
The importance of budgeting reports cannot be overstated. Business budgets help companies manage their money wisely. They also:
- Help businesses plan for future expansion by creating a saving plan or capital reserve account,
- Prevent unnecessary spending on unplanned purchases and spontaneous inventory stockpiles,
- Enable business leaders to set and prioritize goals on a quarterly, semi-annual or annual basis,
- Give an organization flexibility to respond to market changes and economic fluctuations, and
- Empower your organization to control costs efficiently by allocating resources wisely.