Having a business budget Excel template is critical factor to grow your business strategically. Companies Financial planner or Chief financial officer should prepare its budget considering future growth plan of the business.
Best was to assess company performance is to review company Business Budget. It will tell you, whether your company will generate revenue and enough cash or burn net wealth. Therefore, help you to plan for future even.
How to Create a Company Business Budget for Your Business?
Few of the top reasons why businesses and Corporates fail to include pricing and cost issues, strategic plan, losing focus and running out of cash. These issues can be avoided by having a realistic budget management control in place.
Before you can focus on the budget forecasting, you need to prepare you long term and short term business plan to and identify what aspects of your business you’d like to improve. This will allow you to decide what can be done with your funds. Based on that list, you can set up short-term and long-term goals.
These goals will be directly affected by your Cash generation and cash outflow. A short-term goal can be paying off a upcoming debt liability or Capital Expenditure. Long-term goals, like keeping aside marketing expenses or Investment on new product development, are crucial because they are connected to the overall growth of your business.
You should be practical and realistic about the goals you set. They should be purely based on your business’ appetite to spend and save. Once you have your goals in place, you can create an effective, foolproof budget by following these steps.
1. You Analyze Costs through market research
Before you start drafting a budget, you must research the operating costs required for your business. Information on your cash inflow and outflow out gives you the baseline knowledge needed to craft an effective spending plan.
If you create a unrealistic budget and later discover that you need more money for your business activities, this will impact your goals and business sustainability. Budget should be prepared keeping in mind that you can increase your revenue and profit enough as your business expands to handle your growing expenses.
Your budget should consider in fixed, variable, one-time, and unexpected costs. Some examples of a fixed expense are rent, mortgages, salaries, internet, accounting services, and insurance. Examples of variable costs include cost of goods sold and wages and salaries.
There is not much harm in overestimating the costs involved since you will need enough cash to handle your future expenditures. If you are starting a new business line, then you must include start-up costs as well. Planning the budget this way will help you make informed decisions and tackle any unwanted financial surprises.
2. Negotiate costs with suppliers
This step will be useful for those businesses which have been functional for more than a year and are dependent on suppliers to sell products. Before you get started on your yearly budget, have a chat with your suppliers and try getting discounted rates for the materials, products, or services you need before you make your payments.
Negotiations allow you to create trustworthy relationships with your suppliers. This will be helpful when incoming cash is thin. For example, you might have a seasonal business. When you have enough cash saved, you can pay advance amounts to your suppliers as compensation for the times when you are unable to make payments. The main goal here is to find efficient ways to reduce cost of doing business.
3. Asses revenue trend and forecast your revenue accurately
Business fails by overestimating revenue and borrowing excessive cash to meet operational needs. Thus, defeating the very purpose of creating a budget. To keep things realistic, it’s a good idea to assess previous year revenues. Businesses must track revenue periodically on a monthly, quarterly and annual basis.
Your previous year’s revenue figures can act as a reference point for the upcoming year. This will help you set realistic goals for your business, leading to the strategic growth of your business.
4. Understand your gross profit margin
The gross profit margin is the cash reserve left after your business has incurred all the expenses at the end of the year. It gives overview of your financial health of your business. Here’s an example of why you need to understand this parameter while creating a budget.
Suppose your business made a revenue of $5 million and but there are debts to be paid off. At year end, your liabilities are more than your revenue generation, which is not a good sign for a growing business. Thus, it is important to identify the avoidable expenses that are not benefiting the business in any way. The best way to do this would be to list out the cost of goods sold for all materials and deduct them from the overall sales revenue. This information will help you to get a real picture on how your business is faring, allowing you to increase profit and reduce costs.
5. Create cash flow forecast
There are two components to cash flow: Receivables and Liabilities. You need to balance these two components to keep the cash flowing in your organization.
To ensure timely receivables, it’s important to have favorable credit payment terms and the ability to receive payments through common payment channels.
You can encourage payment by giving customers a credit period and creating late payment fee. Beyond this, you must have some money allocated in your budget for ‘bad and doubtful debt,’ in case the customer doesn’t pays you.
When you know your cash in flows, you can allocate budget for your employees cost and other admin expenditure. You can also allocate some money to pay off your fixed vendor expenses.
6. Consider factoring seasonal and industry trends
It’s unrealistic to expect that you will achieve every business goal and reach your estimates every month. In an annual cycle, there will be months where your business will be booming, and there may be a few months where sales are slow. Due to seasonal inconsistency and industry trends, you will have to spend cash effectively so that the business isn’t at risk of shutting down during slower periods.
To overcome this challenge while creating a budget, gather insights as to when your business performs better. The aim should be to generate enough revenue during peak months to sustain the business during off seasons.
For example, let’s assume that you are a business owner of a winter clothing company. Your products are on demand only during that season, so most of your revenue comes during that period. For the rest of the year, you can use the earnings to keep the business going and market to specific target groups, like hikers or travelers. This will help you gauge how successful your products are during off seasons, what revenue to expect, and how much to save during your peak periods.
7. Set spending goals
Making a budget is more than just adding your costs and subtracting them from your earnings. How wisely you spend your money determines how well your business will fare. Goals provide a system to check if your money is being spent on the right areas to avoid unwanted expenses.
For example, if you are spending money on stationary that is going unused for operational or marketing efforts, it may be time to cut those costs. This money can be better applied to your marketing campaigns, bringing in more leads and revenue. Gauge and invest in those expenses that would benefit your business in the long run.
Conclusion
Budgeting is an important process, especially for start up businesses, because it allows business owners to estimate and allocate money for various business activities. Preparing a budget also gives you a transparent idea of the money that may be required to achieve business goals and make sure that there’s enough in hand to handle a crisis. for businesses, it’d get a small amount difficult to form estimations for the entire year because the initial stages of growing a company are often volatile. In such cases, you’ll create smaller budget estimates for a duration of two or three months and keep reviewing it for better results. When an accounting system is introduced, the method becomes even more manageable. you’ll be able to easily handle tasks like projecting income or estimating costs, and you’ll set realistic goals for your business.
