How to create a budget
Creating your budget can be extremely overwhelming. Developing a budget that you can maintain over the long term has been definitively linked to building wealth, while simultaneously helping you get out of debt and cut expenses.
A budget will show you how much money you expect to bring in against all of your expenditures from the required expenses to run your business.
There are a number of things you’ll need to know to put a budget in place while creating a budget:
Time Frame: Choose a time frame for your budget. Whether you choose monthly, quarterly or yearly budgeting will depend on the needs of your business.
Fixed costs: The definition of fixed expenses is “any expense that does not change from period to period,” such as salary, rent, insurance and any other known costs. You know they are due on a regular basis.
Variable costs: are those business expenses which vary depending on the volume of business, sales, or the volume of transactions. Enter all your variable expenses like utilities, direct costs of materials and staff wages.
Income:An income budget is a specific type of budget that only shows how and where money is earned. The income budget is used to make financial plans and pinpoint which stream of income is the most lucrative at any given time.
Actuals: The actuals reflect how much revenue has been actually generated or how much money has been paid out in expenditures at a given point in time during a fiscal year. Record the actuals, and calculate the difference between your budgeted amount and actual income and expenses.
Analysis: Budget analysis is exactly what it sounds like – sitting down with a budget and reviewing it in detail. The purpose of budget analysis is to understand how your organization’s money is being spent and managed, and whether the budget meets your goals.
Budgeting and forecasting
Budgeting and forecasting are two of the most important financial functions for a business of any size. Budgeting and forecasting are often linked together, as they should be, but they’re not the same.
A budget is a detailed financial outline of what the business thinks will happen over a period of time (often a year) financially. The budget will include details about the company’s revenues, expenses, cash flow and financial position.
Forecasting is an important tool to help a company make necessary adjustments in spending and focus during the year as the business changes.
While you may rely on an accountant or bookkeeper to prepare your financial statements, always check them carefully for accuracy and ask questions. With your knowledge of your business and some financial training, you can ensure that your statements are up to date and accurate.
Ensure that you have a basic bookkeeping system set up to ensure you keep track of all your financial situation.
While budgeting and forecasting are different functions, they are not mutually exclusive of each other. In fact, a good forecast feeds the development of a sound budget. During the year, comparing the most recent forecast to the budget for the rest of the period can help the company make needed adjustments to meet changing business conditions.
If all this sounds a bit confusing, our accounting services, can help without much effort. You can also reach out to our accountant to make sure you’re on the right path.
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