Creating a budget and sticking to it is one of the most critical decisions in the financial planning of any business. Making a budget consists of estimating income, a prediction of expenses, and an allocation of resources. It is a tool that is considered essential to know in which direction your business is going and how it will do to achieve its goals. It’s like plotting the route on a map: you detail the cost of each section to the final destination and the way to finance the trip.
Budgets are planned for different periods (monthly, quarterly, annual) and are completed as time goes by. They are also a flexible tool in which you can make the appropriate corrections so that the projection is attached to reality. These budgets are part of the financial planning that every financial director must develop to guide the company in the future and can be extended to establish business growth goals in the short or medium term (three or five years).
Types of budgets
The most important for the administration of a company are:
Capital budget: It reflects the long-term management of investments in fixed assets made by the company — for example, plants or offices, equipment, and work tools, computers, licenses, furniture, etc.
Operating budget: It refers to the forecast of sales revenue that the company will have in the period to be considered. Operating costs are deducted to obtain the net profit that the organization will be registering.
Cash flow budget: Knowing your utility will be important, but it is more to know how and when the money will flow to your company. If you do not have enough money to pay your monthly expenses, the treasury should plan how the operations will be financed.
Components of a budget
Every budget is made up of figures that correspond to three primary items that we already mentioned:
Sales and additional income: The income you get for these concepts is the basis of your budget. As it is about establishing projections, it is better to be as conservative as possible so that you do not take unpleasant surprises.
Total costs and expenses: Your income is directly linked to your sales. Produce the goods and services offered by your company generates a price that you should consider. These costs or operating expenses can be fixed (income, services, insurance), variables (raw materials, inventories, transportation), and semi-variable (salaries, advertising).
Utilities: The subtraction of the two concepts mentioned above will show you how much your profits amount, which is the capital for your growth plans. If your projection of profits is not favorable or does not correspond to your industry’s average, you should make adjustments to your costs and seek to boost your sales.
How to start?
A budget begins based on the statement of the results of the previous year. If your company is new, the advisable thing is that you make a conservative estimate and attached to the reality of your sales and profits in the following year of operations.
You must consider the economic or market factors that could affect your sales projections -and, therefore, your profits. This will only be achieved if you keep informed about the movements of the markets and the behavior of your current customers and potential.
The next step is to calculate your operating expenses. You will also be using all the information about the markets you may have, whether financial, the stock market, or consumer. It includes a list of all the inputs you need to produce your goods or services and economic and business expenses. Finish by calculating, based on income and costs, what will be the utility of your capital investment.
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