Determine Your Budget
A budget is a quantitative expression of a financial plan for a defined period of time, which can include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities, and cash flows.
In short, it is a written estimate of how a business will perform financially. A business needs to accurately predict its financial performance to be certain that resources such as money, people, and equipment are used efficiently.
A business budget includes how the company plans to spend money, how it plans to make money, and the amount the company estimates it will make in a given time period.
These are determined by estimating planned sales volumes, revenues, resources quantities, costs, expenses, assets, liabilities, and cash flows.
By setting up a budget, you gain insight to where the business’s money is being allocated, and how to manage the money you have more effectively.
Business Cash Flow
One important aspect that every business owner should be thoroughly competent is the cash flow of the business. Cash flow is the solvency of the business, and it is crucial to the survival of a company. Having ample cash on hand will ensure that your creditors, employees, and other expenses are paid on time.
The statement of cash flows is used by analysts to gauge financial performance. Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash, and thus gain a greater profit.
Developing a Start-Up Budget
To calculate a budget for your start-up, you need to make a list of all necessary purchases, including tangible assets (i.e. equipment and inventory), services (i.e. insurance), working capital, and collateral.
Your budget should explain how you determined these numbers and a description of your expected financial results.
To get started, develop a target for your sales revenues. In other words, estimate what kind of realistic profit you’d like to see this year. It’s important to start with your sales and profits, because you’ll use this information to drive your costs, expenses, and capital expenditures.
Next, calculate your operating expenses. Review your financial statements to create an itemized list of fixed and variable costs you incurred, including salaries and wages, rent, postage, research, travel, utilities, taxes, and so on.
If you’re just getting started and don’t have any financial statements yet, estimate to the best of your ability that costs you are likely to incur in the year ahead.
From there, your next step is to figure out your profit margin. If you’ve been in business for a while, this will be easy, but if not just estimate the cost of your goods sold (beginning inventory, goods manufactured or purchased, shipping charges, etc.) and then subtract that from your overall sales revenue.
Once you have your budget drafted, you can use that to go back and adjust your figures. For example, you may find you need to purchase fewer supplies or cut costs in the year ahead in order to make a profit.
Or you may find you have room to add an employee or two to grow your business. Just remember to use realistic figures so that your budget will guide your business to success.
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