What Is a Budget?
A budget is a projection of your future income (Revenue) and expenses for a specific period, usually a year. Like everything in your business, the “money stuff” must be planned AND managed. The tool to help you do this is your budget.
Your budget is the financial plan for your business. It provides you with a forecast of monthly revenue and expenses; usually for a year. A good best practice is to track your budget against your actual monthly results allowing you to determine if you are on track and if you are not allowing you to respond in a proactive manner.
Much of business management is about reviewing what has happened in the past and taking corrective action as required. For example, when you review your Profit & Loss, it is like looking through a rear view mirror. This is what happened in the past.
A budget, on the other hand, is what you want to happen in the future. It maps out how you want the flow of money to be from incoming revenue to outgoing expenses. This is the power of budgets. This is business management.
Why do you need a Budget?
Aside from the super benefit of having a financial plan to help steer your company, the benefits of a budget are awesome!
- It sets out the money plan for your business; it puts you in control
- It makes you really really think about the year ahead
- It gives you peace of mind by knowing the possibilities and probabilities
- It provides financial control
- It provides the financial roadmap to measure your financial results
- Tracks results against the plan (budget) to enable you to take corr4ective action before it is too late. Puts you in control
- It is a fantastic decision making tool
- It is the responsible thing to do
How is a Budget organized?
The information in a budget is organized into the same categories as you would find in your Profit & Loss.
Revenue:
- This is the money you anticipate getting from your customers in exchange for your services and products they buy from you.
- You may have 1 revenue stream or you may want to track multiple streams of revenue depending on your business.
Cost of Revenue & Gross Profit:
- Cost of Revenue; it costs money to generate revenue; for example:
- Consulting revenue needs consultants that must be paid
- Product revenue requires us to buy products or raw materials
- Membership Revenue needs a platform and technical support
- Subtract your Total Cost of Revenue from your Total Revenue and you get your Gross Profit.
Operating Expenses:
- These are the day to day expenses to keep the business operating. Examples are Office Rent, Non-billable Team Salaries, Marketing Expenses etc.
- Also included here is the business owners Salary; very important!
One final point before you move on; we want to emphasis a very important aspect to budgeting. Budgeting is an iterative process:
- You do your first cut of a budget based on your anticipated revenue and plans for the year
- You evaluate the results
- If the results are not what you want, which it won’t be, you make changes
- You evaluate the results of the changes
- If the results are not what you want …… etc etc 😊
Your budget will put you on a stronger financial footing for both your and day to day business management and your long-term growth.
Feel free to be in touch and we will happily share our budget template to kick-start your money management.
