Budgeting in Business: Best Practices and Examples

Budgeting keeps your business’s financial plans organized and sets up a framework for future financial decisions. Understanding your budget and working to improve it over time is one of the keys to having a financially secure company. If you’re planning to start or grow your business, spend time learning the basics of budgeting to start investing in future success. 

 

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What is a budget?

A budget is a document that provides a plan for a business’s income and costs. It anticipates the resources different projects will need and determines where those funds will come from. Budgets can be designed for a certain period of time, such as a monthly or yearly budget, or they can be dedicated to a certain event or project. They indicate how funds should be spent so that everyone with purchasing authority can coordinate their expenses.

 

Related: What Is Bottom-Up Budgeting?

 

Why are budgets important?

Budgets are the basis of a business’s action plan for financial decisions. They ensure that company money is being spent mindfully to support business goals, drive sales and secure employee benefits. They also identify how much money is available to invest back in the business and create a reliable estimate for future income, making sure that the company will not run out of money for operating expenses or future projects. It restricts unnecessary spending and encourages managers to be strategic about purchases.

 

Business budgets also communicate company priorities to staff, allocating funds to the most important parts of the business plan. Comparing actual spending to the projected budget can help you produce more accurate projections for future months, increasing your financial efficiency and optimizing profits. They provide benchmarks for long-term financial goals by breaking them down into short-term spending suggestions.

 

Read more: Budget Management: Three Skills Essential for New Managers

 

Best practices for creating a budget

Your budget can impact your financial success and overall organization as a business. Follow these steps to create a budget that contributes to the success of your business:

 

1. Gather past spending details

Make a list of all sources of income and expenses based on your business costs and earnings in previous budgeting periods. Include start-up costs and expected recurring bills. Subtract all expenses from income and make adjustments to have the desired amount of money left over.

 

If you are creating a budget at the beginning of your business and don’t have past expenses to base it on, make estimates with room for flexibility. At the beginning of a business, it is smart to have more money allocated to a flexible discretionary fund so that you can absorb unexpected costs. As time goes on, you will get a more precise idea of your regular and one-time expenses. 

 

2. Automate your budgeting tools

Enter all of your financial details into an application or software program to simplify your budget reporting. Automated budgeting tools can improve the accuracy and efficiency of financial forecasts. They can also help you see trends in projected versus actual income.  

 

3. Use details carefully

While it is important to keep track of spending, budgets should be able to show you the big picture of how money is allocated. Too many details can make it difficult to see trends and categorize costs. A budget that lists out exactly how each dollar should be spent can also limit a company’s ability to be flexible with its needs. 

 

4. Be transparent

Share your budgeting plan with your team and ask for feedback on ways it could be improved. If everyone understands where funds are being allocated, they can better align their work with company priorities. Communicating your budget and regularly discussing its effectiveness increases accountability across the company.

 

Basic budget template and example

Here is a budget template with example data that you can use to start recording expenses and comparing them to real business costs:

 

  Projected Actual
Operating income $10,200 $11,900
Retail sales $3,000 $3,200
Online sales $7,000 $8,500
Other income $200 $200
Account interest $200 $200
Operating expenses $8,700 $7,565
Rent $1,000 $1,000
Utilities $200 $215
Insurance $500 $500
Salaries $6,000 $5,500
Other expenses
$1,000 $350
Net income $1,500 $4,335

 

Frequently asked questions about business budgets

 

What are examples of monthly expenses?

Examples of regular monthly business expenses include rent, utilities, payroll, insurance and supplies. 

 

What is zero-based budgeting?

Zero-based budgeting involves listing every expense to create a new budget from scratch.

 

What is an operating budget?

An operating budget is part of a business budget that summarizes day-to-day expenses and income of a business over a given period, usually a year or a financial quarter.

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