Preparing a Budget for Your Small Business

Working from a budget is useful for your personal finances, and even more so when you start a small business. While the word 'budget' may instantly trigger feelings of being restricted, or having to cut back on expenses, it really just means planning your spending before you do it. A budget enables you to see where your money came from, where it went, and how much was left at the end of the month. It's an invaluable planning and organizational tool, and when used properly actually lends a sense of freedom and peace of mind. Knowledge is power, and knowing exactly how your money is allocated frees you from always wondering whether you've got enough to pay the bills. More than just staying afloat, your business is in business to make a profit. Your budget reflects the financial goals of your business, and is an easy way to show how well these goals are being met.

In the course of business, eventually the need for financing will arise. In order to qualify for favorable financing terms, you'll need to demonstrate that your business has its financial information in order. One item creditors will examine is your budget. Your business budget is a good indicator of how well you handle money, which in turn shows the likelihood that creditors will recoup any money they lend your business.

The specific categories for a business budget may vary from those for a family's budget, but the larger headings are the same: income and expenses. Within these headings, there are separate lines for each source of income and each type of expense. The numbers in the budget must be based on reality to be meaningful – either from past performance and expenses, or from a reasonable estimate. As a brand-new business, you'll be using estimates until you have solid figures in place. Your CPA should be able to help you arrive at reasonable estimates.

As your business gains experience, you'll shift to using figures provided by the various departments in your organization. The sales department can furnish reasonably accurate income numbers based on its goals and prior performance. Also included in income are interest payments, dividends, and accounts receivable. Expenses include money paid out for office space, equipment, supplies and materials, personnel, taxes, travel and entertainment, professional fees, and utilities, to name just a few major categories. Stated simply, any money that comes in or goes out from your business should be reflected in your budget.

Budgets should be prepared on an annual, quarterly, and monthly basis to ensure the best possible accuracy. For some businesses, income fluctuates throughout the year. In this case, it's especially important to hold sufficient income in reserve to use for ongoing expenses incurred during the slow season. Consistently evaluating planned and actual performance and expenses allows your business to adjust its strategies and tactics to achieve the best possible results. This continual review makes your business better able to shift its resources to focus on the revenue streams that are most productive.