Do you have a working budget for your business? I am not talking about having a budget that does not go beyond what you have written down on a paper. You may even be using a budgetting software? But if it does not translate to guiding you to manage the financial resources of your business, you need to take a pulse. You need to review your business financial transactions before you hit the wall.
What is a budget?
According to Cambridge dictionary, a budget is “a plan to show how much money a person or organization will earn and how much they will need or be able to spend“. I will like to add that budget works with timeline. If you plan to spend A naira, you need to specify over which period you would be spending the money. The same applies to the revenue you expect to make as a company. Budget does show what you intend to spend and make over a certain period of time.
Why do you need a budget?
You may be saying that budget is only for big businesses or executives. No matter what the current level of your business is, you surely need a budget. If the millionaires and top business executives operate a budget, you have no excuse. Budget will help you to achieve the following:
- Provides a forecast of revenues and expenditures i.e. construct a model of how your business might perform financially speaking if certain strategies, events and plans are carried out.
- Enables the actual financial operation of the business to be measured against the forecast.
- Helps you to determine exactly how much revenue you need to break even
- helps you to cultivate the habit of discipline
One main reason why you need budget is because building wealth is not possible without discipline. No matter how small your budget is, it makes it easier for you to set goals and also ensure that you establish reasonable boundaries that are required for you to meet those goals. Measuring how you perform then becomes easier. If you lose ground, a budget will alert you and try to put you in check. You need to know that your budget does not have to be rigid. You can adjust your budget if you feel things may not go as planned. And if you exceed your goals, a budget gives you some freedom to enjoy the excess you are blessed with.
How to set up a budget?
Now that you understand fully why you need a budget, I believe it is necessary for us to quickly discuss how to put together a working budget. So, get yourself a sheet of paper and a paper and follow me as I walk you through some of the steps. These are just to serve as guide. If you really want to understand how to setup budget, you may need to visit a bookshop and pick a book on this area:
- Gather all your business financial records
- Record all sources of income for your business with exact amount that you earn via each means
- Create a list of your expected monthly expenses: One easy way to get this done is to document your expenses for the next one month. This will give you a clue into what your monthly expenses will look like
- Break your monthly expenses into fixed and variable: Fixed expenses will remain the same every month variable expenses are those that may change from month to month
- Sum up your total monthly income and expenses
- Make necessary adjustment to ensure that your income always exceed your expenses (or atleast ensure both columns are equal)
- Review your budget monthly
The next step is to ensure that you translate what you have read now to action. if you are yet to setup up your budget still, it is time to get your hand dirty. Ensure that you have something documented. You don’t have to get it write the first time. Your focus is to ensure that you have something to help you cultivate a sense of discipline. So, will you say you have a workinf budget now? If your answer is still now, get down to work. Give yourself no alternative till you setup your working budget.
NB: This post originally appeared at Achievepace
Image credits: 401k