Are you a business owner who makes things happen or watches things happen? You can position yourself to be able to make things happen by planning your operating, capital and cash budgets. Without a comprehensive plan, you could be left to watch things happen – or worse, wonder what happened.
Why Have a Budget?
A budget is a way of considering in advance how your business spends and brings in money over a length of time. Ideally, a budget helps you maintain control of your finances and be aware of trends – both good and bad.
Additionally, most businesses at one point or another need help getting through lean times. A budget that neatly details your income and expenses is a crucial part of an effective business plan that justifies the need for a loan and increases the likelihood a loan will be approved.
What Should Your Budget Include?
Your budget is a powerful business tool because the process of putting it together forces you to realistically think through the numbers. When it's done, your budget can help you make better decisions – grounded in data.
Your overall annual business budget is actually a combination of three smaller budgets:
Your operating budget tracks common expenses and overhead costs for the year, such as payroll, supplies, advertising and insurance, and breaks out into:
- Expenses – anticipated costs
- Revenue – estimated income
- Statistics – a projection of incoming contracts, orders and clients for the coming year
Your capital budget lists expected expenditures for fixed equipment, such as a building addition or a new roof, and major movable equipment, such as computers. If you have several capital needs, prioritize them based on net present value (NPV). A simple way to calculate NPV is to subtract the cost of the capital from the expected cash inflow from the new capital. Focus on projects that have positive NPV.
Your cash budget is a projection of your business's cash inflows and outflows. It typically requires more strategic thinking than your operating and capital budgets. For example, overestimating monthly incoming client payments may look good on paper but does no good if you don't have cash in the bank to pay your bills each month.
Time Is Money
One of the most important things your budget needs is time. Start collecting past expenses and income information months in advance for the most accurate projections.
You can save time with customized financial services that help organize your business's budget data easily and efficiently. PeoplesBank offers high-tech deposit account services, convenient cash management products and a wide array of business loans. Contact us today!