THE COST OF DOING BUSINESSBasic Budgeting Tips for
Every Business DIAMOND BAR, CA - Just about every business, even one-person businesses, needs some kind of spending plan or some means of looking in advance at the money that must go out relative to the money projected to come in. That, in essence, defines a budget: a projection of both income and expenses for a coming period of time. Why use a budget? In a practical sense, this question is answered in the opening quotation above. There are, however, additional reasons for using a budget. Someone who seeks a loan or other financing for business purposes is usually expected to produce a business plan, which invariably includes information concerning projected income and expenses. No business venture should ever proceed without planning, and a budget is the financial plan for conducting business in the near future. An operating budget consists of three parts: 1. The statistical budget, which is the best available projection of business activity for the coming year (units or pieces to be produced, contracts to be secured, estimated business activity, etc.). 2. The expense budget, which consists of all anticipated costs of operating the business and conducting the projected level of business. 3. The revenue budget, which is a projection of estimated income for the coming year. A capital budget accounts for potential expenditures for major fixed equipment (for example, a building, a boiler or a new roof) and major movable equipment (copy machines, computers, etc.). A cash budget is usually prepared last in the budgeting process and consists of estimates of the business' cash needs for the year, as compared with projections of the cash receipts for the year. The need for serious consideration of the cash budget is itself sufficient reason to justify the budgeting process and the work it involves. The pattern of cash-in versus cash-out is extremely important to any business because of the need to always remain financially solvent in the short run. It does no good to appear rich on paper - to own numerous physical assets or be owed significant amounts of money, for example - if you do not have sufficient cash in the bank to pay today's bills. Many enterprises that appeared solvent on paper have failed because of their inability to meet current cash obligations. At the very least, a cash shortage can trigger short-term borrowing, which leads to increased operating expenses because of today's significant interest rates. Some principles and practical rules of budgeting for the small business include: * Expenses must always be charged to the department or activity incurring the expenditures.* Every item of expense in the business must be under someone's direct control.* Managers responsible for complying with an expense budget must participate in preparing the budget.* No one should be held responsible for expenditures over which he or she has no control.* Unused funds budgeted for expenses may not be carried over from one year's budget to the next.* Unused capital-budget funds may not be transferred into operating expenses or vice versa.* All individual expenditures must be approved by the appropriate levels of responsibility. A breakdown of the expenses charged to a department or activity, such as salaries, benefits, supplies, travel, postage, etc., is essential. In other words, you must keep track of how much money is going into each category of expense, as well as how much you are spending in total. On a final note, a budget cannot be adequately prepared during the final week or two before the new budget period begins. In the majority of cases, the most accurate indicators of future costs are past costs adjusted for whatever is known about the coming period, such as changes in business activity, expected price increases, etc. This suggests that you should collect information used in preparing the budget, especially information concerning expenses, several months ahead of time. No one knows for sure what the future, even the very near future, will bring, but an intelligently prepared budget can minimize the likelihood of finding yourself wondering where the money went.(Sources: SEMA; Charles R. McConnell, "Budgeting Basics," The National Federation of Independent Businesses)
Every Business DIAMOND BAR, CA - Just about every business, even one-person businesses, needs some kind of spending plan or some means of looking in advance at the money that must go out relative to the money projected to come in. That, in essence, defines a budget: a projection of both income and expenses for a coming period of time. Why use a budget? In a practical sense, this question is answered in the opening quotation above. There are, however, additional reasons for using a budget. Someone who seeks a loan or other financing for business purposes is usually expected to produce a business plan, which invariably includes information concerning projected income and expenses. No business venture should ever proceed without planning, and a budget is the financial plan for conducting business in the near future. An operating budget consists of three parts: 1. The statistical budget, which is the best available projection of business activity for the coming year (units or pieces to be produced, contracts to be secured, estimated business activity, etc.). 2. The expense budget, which consists of all anticipated costs of operating the business and conducting the projected level of business. 3. The revenue budget, which is a projection of estimated income for the coming year. A capital budget accounts for potential expenditures for major fixed equipment (for example, a building, a boiler or a new roof) and major movable equipment (copy machines, computers, etc.). A cash budget is usually prepared last in the budgeting process and consists of estimates of the business' cash needs for the year, as compared with projections of the cash receipts for the year. The need for serious consideration of the cash budget is itself sufficient reason to justify the budgeting process and the work it involves. The pattern of cash-in versus cash-out is extremely important to any business because of the need to always remain financially solvent in the short run. It does no good to appear rich on paper - to own numerous physical assets or be owed significant amounts of money, for example - if you do not have sufficient cash in the bank to pay today's bills. Many enterprises that appeared solvent on paper have failed because of their inability to meet current cash obligations. At the very least, a cash shortage can trigger short-term borrowing, which leads to increased operating expenses because of today's significant interest rates. Some principles and practical rules of budgeting for the small business include: * Expenses must always be charged to the department or activity incurring the expenditures.* Every item of expense in the business must be under someone's direct control.* Managers responsible for complying with an expense budget must participate in preparing the budget.* No one should be held responsible for expenditures over which he or she has no control.* Unused funds budgeted for expenses may not be carried over from one year's budget to the next.* Unused capital-budget funds may not be transferred into operating expenses or vice versa.* All individual expenditures must be approved by the appropriate levels of responsibility. A breakdown of the expenses charged to a department or activity, such as salaries, benefits, supplies, travel, postage, etc., is essential. In other words, you must keep track of how much money is going into each category of expense, as well as how much you are spending in total. On a final note, a budget cannot be adequately prepared during the final week or two before the new budget period begins. In the majority of cases, the most accurate indicators of future costs are past costs adjusted for whatever is known about the coming period, such as changes in business activity, expected price increases, etc. This suggests that you should collect information used in preparing the budget, especially information concerning expenses, several months ahead of time. No one knows for sure what the future, even the very near future, will bring, but an intelligently prepared budget can minimize the likelihood of finding yourself wondering where the money went.(Sources: SEMA; Charles R. McConnell, "Budgeting Basics," The National Federation of Independent Businesses)
