Download a Budget Template (Excel)
What is a budget?
In short, a budget is a financial plan. It is a financial document used by individuals or companies to project future income and expenses.
A budget is a vital business tool as it determines the profitability of a company by controlling and monitoring expenses, revenue and cash flow. If the company’s costs are more than the income it can generate then the business is running at a loss. If the income outweighs the costs the business is profitable.
If a profit is projected on the budget the company can choose to expand the business or invest. On the other hand, if a budget predicts a loss, a company may have to look at cutting some costs.
When starting a new business, a budget is an essential part of the business plan. A budget should also be included in a marketing plan, business proposal and many other business documents. Existing businesses should ideally budget monthly for at least a year and quarterly for at least three years. At the very least, existing businesses should budget annually.
The purpose of a business budget
To monitor the performance of a company it is essential to budget. Primarily, a budget is used to plan and control the financial future of the company. It can also be reviewed against actual sales and expense figures to address problems before they become a catastrophe.
There are many reasons why a company needs to budget, including:
- To calculate how much start-up capital the business needs for the business plan to be executed.
- To determine how much the business can afford to pay out on salaries.
- To apply for a business loan from financial institutions and banks.
- To seek funding from investors.
- To determine how much profit a business needs to make to cover expenses.
- It drives important business decisions (such as hiring staff, cutting expenses, increasing marketing, etc.).
- To set financial targets and achieve business objectives.
- To motivate staff.
- To minimise risk to the company.
- To allocate appropriate resources to projects.
- To anticipate potential financial problems.
- To determine a gross profit margin.
How to create a business budget
It is best that the owner(s) of the company draft the budget as he/she best understands the business’ needs and environment. It is, however, also wise to seek the guidance of an accountant to ensure that the profit margin is appropriate.
A budget can be created on financial software (preferably) or manually on a spreadsheet. You can download a business budget template for Excel from Microsoft. Your budget template should include a blank column for recording actual results in real time. This will help you monitor the performance of the company and make adjustments to the budget if necessary.
The format of a business budget is based on the mathematical equation “sales – expenses = net profit/loss”. The budgeting process for a new business is entirely different than that of an existing business.
|Existing business||New business|
A good place to start when creating a budget is to determine the target sales and profit amounts. It will help you decide how to distribute funds to cover the costs. Be as realistic and accurate as possible – leaning to the conservative side. New businesses must base these amounts on research into other similar companies.
There are three types of business costs:
- Fixed costs are independent of sales revenue. Examples of fixed costs include rent or mortgage payments, insurance, loan repayments, vehicle and equipment leases, and fixed utility amounts (like internet costs).
- Variable costs increase or decrease in correlation to sales volumes. For example, raw materials, freight, commissions and running utilities (like electricity, gas or water).
- Semi-variable costs are fixed costs that can be influenced by sales amounts. Salaries and advertising are examples of semi-variable costs.