Your business budget is one of the most powerful tools you can use. It shows you just how much money your company has and how much you are spending in the short and long term as you keep your operations moving. Budgets also help you visualize your current financial situation and can guide you toward better decision-making, resulting in less overspending and more financial growth.
What Are the Types of Business Budgets?
The term “business budget” often consists of a combination of budgets that work together to create a complete financial picture for the business. In last month’s article, we went into detail about the types of business budgets a company can utilize to create that picture. To recap, the various types of business budgets include:
Master budget
The master budget tracks all your company’s revenue sources and expenses by monitoring all of your smaller, more focused budgets.
Operational budget
The operational budget includes all revenues used for your business operations and factors in all company expenses you can expect to pay monthly, quarterly, or annually.
Sales budget
The sales budget tracks your sales-specific revenue and expenses so you can see how much money should go toward sales and predict how much income to expect.
Production budget
Your production budget shows you how much money it takes to produce each product or provide each service within a particular timeframe, how many products or services are needed to meet your sales goals, and how much inventory is required. Production budgets help you set prices for your products or services.
Labor budget
The labor budget shows the number of employees needed to keep business operations moving and meet production goals, as well as the amount each one can be paid.
Overhead budget
Your overhead budget calculates any of your variable or fixed expenses within a particular period, including your rent, insurance, taxes, payroll, supplies and materials, commissions, delivery costs, utility costs, etc.
Cash flow budget
Your cash flow budget includes all your revenues and expenses within a month, quarter, or year and shows you how much money comes in and how much money goes out within that period.
Financial budget
Your financial budget helps you plan short-term and long-term financial goals and organize the strategies necessary to achieve those goals. It uses tools like your cash flow, sales, production, and other budgets so you can create targeted financial goals and design management systems that will help your team work to reach your goals.
Capital budget
The capital budget is used for big purchases, such as land, vehicles, large pieces of equipment, etc. The budget evaluates everything related to the purchase, including the total cost, down payments, monthly payments, payback periods, ROIs, etc.
Not every business needs to utilize every type of budget, but a combination of the most applicable ones will provide what you need to know regarding your revenue and expenses.
How to Create a Business Budget
To create a business budget, you first need to decide which budget(s) would benefit your business and operations the most. You can always start with what you believe would be the basics and expand on your budget as your business continues to grow.
In the most basic terms, the creation process for a business budget includes:
1. Calculating your monthly revenue
Evaluate all your revenue streams from the past year (12 full months) to determine your average monthly income.
2. Calculating your fixed and variable costs
Your fixed costs are any payments that do not fluctuate month to month. This can include leases or mortgages to vehicle payments, insurance, certain utilities, salaries, and others. Add all your fixed costs together to see what you always owe. Also calculate your variable costs, or the payments that fluctuate month to month or are not always due on a monthly basis. This can include raw materials, production supplies, delivery costs, certain utilities, commissions, etc.
3. Calculate your profit
Subtract the total of your fixed and variable costs from your revenue total. When you remove the fixed and variable costs from your revenue total, you’ll see precisely how much money you have for investment in your business growth.
4. Create a contingency fund for the unexpected
You can budget all day long, but contingencies that require emergency funds occur. Equipment breakdowns, structural damage to your building, or damage to your production materials are just some of the examples of what can happen that would require some readily available funds to repair or correct. Determine how much of your net income can go toward an emergency fund. You can feed the fund monthly for better protection.
5.Use your budget to make important decisions
Based on your net income results, begin using your budget to make and stick to more profitable decisions. Did you come across some expenses your company can do without right now? Are you overspending in any way? Are there opportunities to gain more revenue? Now is the time to set spending and earning goals on a monthly, quarterly, and yearly basis, and let your budget be your guide as you work toward them.
Budgeting is a tool that your business can significantly use to your advantage to gain more revenue and experience financial growth. Create and stick to your budgets with confidence with help from ClaytonCarter.
Cristen Carter is a CPA with more than 30 years of experience serving clients. She can help you think through your finances and create realistic, effective budgets for your business. By partnering with her firm, you will have expert eyes on your finances, tracking cash flows, pinpointing issues, and detecting areas to help increase margins and build an even healthier financial picture.
Contact our team today to change how you budget for your business! (478) 621-4145
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