How to Create a Budget for Your Business

When your business is small, you may think that you can manage the flow of money coming in and going out without keeping too close of a watch on it.  Maybe so, however, when your business begins to grow, it becomes too complicated and overwhelming to account for every expense that is incurred.  If you’re not budgeting your expenses, it’s like driving a car with a broken gas gauge.  Every well-run business has a predefined budget that is followed.  Without one, your business could be hemorrhaging cash and you wouldn’t even know it.

A budget is an estimated allowance for expenses that you know or suspect your company will incur.  The best place to start is your previous year’s financial statements or general ledgers that have been created by your accountant.  There you will find a chart of accounts along with how much was spent for each expense.  If you haven’t yet completed a full year of business or if your accountant hasn’t completed your previous year’s financial statement, you can figure out your expenses by reviewing your bank statements, credit card statements, payroll and check stubs.

Create an itemized list of expenses.  These may vary predicated on your type of business but below is a list of some common operating expenses that most businesses have:

• Office Supplies
• Communication
• Advertising
• Printing
• Insurance
• Salaries
• Rent
• Utilities
• Auto and Travel
• Meals and Entertainment
• Taxes
• Dues and Subscriptions
• Bad Debt
• Freight and Shipping
• Office Expenses
• Penalties and Fines
• Inventory
• Repairs and Maintenance
• Machinery and Equipment
• Bank Fees
• Professional Fees
• Cost of Goods Sold
• Research and Development
• Depreciation and Amortization
• Miscellaneous 

Some of these expenses may not apply to your business or you may have additional expenses not included in what’s listed above.  Nevertheless, once you have categorized each expense and created an itemized list, you must then estimate a realistic spending amount for a certain period of time, for example: monthly, quarterly or annually. 

The obvious goal here is to analyze how much revenue your company generates versus how much is being spent on these accounts.  The more accurate your budget is, the more useful it will be.  If after the predetermined period of time (monthly, quarterly, annually) you have exceeded your budgeted allowance, you will need to decide if it is necessary to cut back spending or expand the budget based on your company’s needs. 

Having these figures down on paper or on a spreadsheet is the only way to accurately monitor the flow of cash at your company.  It can’t be done in your head.  If your previous year’s income is higher than your estimated budget figures, then you know you’re on the right track.  If your company is spending more than the projected budget allows, you need to ask yourself why.  If it’s because your company is expanding, then you may need to adjust the figures in your budget accordingly.  If not, then there is overspending taking place.

At the very least, creating your budget will allow you to do a break even analysis.  It’s important to know how much it costs you to run your business per day, per month, per quarter, per year.  If you don’t have this information, you are blindly running your business, which is how companies encounter cash-flow problems.  Tracking your budget will provide more insight on the flow of money and make it easier to determine if you can make certain expenditures or not.

For more information about how to develop a budget for your business, please call Ashlar Consulting Corporation at 305-849-9399 or visit www.AshlarConsultingCorp.com.