Every business should have two types of budgets that are developed each year: an operating budget and a cash budget. The first covers the expenses of running a business and the estimated income from sales. This is usually reserved for short-term projections. The latter is the most important because it covers the cash inflow (sales, business loans and investment) and outflow (machinery and credit). The purpose of this budget is to see where money is being spent, to determine if a business loan is needed and to ensure that a company does not run out of money.
For growing businesses,, a budget is especially helpful when determining whether or not to take out a business loan, to see whether or not investors can be brought in and to see if new supplies can be purchased.
Starting a new budget for the first time can be difficult. Even figuring out where to begin can cause a headache. Here are some simplified steps to get you started:
1. Beginning Cash Balance
This first step is the easiest. Look at the business account and determine how much cash there is to begin.
2. Add Revenue
Combine your receipts or checks that will flow into the business account each month. Doing this for an entire year is often helpful because your business may be seasonaland only does well during certain months. A lawn mowing business, for example, will have more cash flow during the spring and summer than in the fall and winter. This yearly projection of revenue will help give a more accurate depiction of cash flow. If there is money coming into your business from loans, this should be accounted for.
3. Calculate and Subtract Expenses
The first types of expenses to subtract are operating expenses, which includes rent, salaries, utilities and supplies. The second type to subtract is the the amount it costs to produce your product, such as the cost of materials and machinery.
4. Financing and Business Loans
Once everything is totaled for the year, there may be a cash deficiency. If there is, the price of product may need to be slightly increased. If this still doesn’t help, a business loan may be necessary. Business loans are appropriate when starting a business to help pay for the cost of starting materials, such as equipment and machinery. If these can be covered by a loan, your business may get the head start it needs. Over time, revenue should exceed expenses, and business loans can be paid back. The important thing to remember is not to fear taking out a business loan—almost all business need them when they first start out.
Jessica Jensen believes that preparation will get you anywhere. She writes for Farmers National Bank, a bank in Twin Falls that offers great personal and business banking features.