Benefits of a Business Budget
Many small businesses are unaware of real benefits of a business budget. An operating budget is essentially an estimate of expected business income and expenses for the next 12 months. This budget is then used to compare the forecasted financial performance of the business with actual performance.
A detailed budget allows Management to keep track of business cash flow therefore avoiding overspending. It also allows to identify transactions resulting in losses. Preparing a business budget with an accountant who deals with clients in the same industry means that your expenses can be compared to similar business ventures.
A budget can also be used as a safeguard against fraud. The expenses in the budget are based on expected outgoings which usually remain constant from year to year. If the actual expenses drastically vary from the budgeted figures, then it might be a possible indication of fraud within the business.
4 key steps to set up a business budget:
1. Estimate your monthly sales income for the next 12 months
2. Underneath, record all your fixed expenses per month (e.g. rent)
3. Record all your variable expenses per month. Look at your previous years’ variable expenses and estimate what these figures will be for the next 12 months
4. Using sub-total rows, work out the operating profit and apply tax to the profit as a separate row item – this is will be the estimated tax payable for the next financial year
Make sure you take into account possible industry and economic changes and seasonal changes that impact on your business.