Do you think budgeting is overwhelming? Well, that’s understandable but it doesn’t have to be. And it’s perhaps one of the most useful things that you can do to achieve your business’s financial goals. So, if you’re feeling a little concerned about how to create an effective budget, then look no further. Here, we will talk about the different, straightforward steps you need to create a budget.
Figure Out What Your Income is
The first thing that you will be required to do when creating your budget is to ascertain what your income is. This means that you need to know about all of the channels through which you generate income. When running a business, you often diversify ways of generating income. So, if you have more than one source of income, then you need to consider each one of them in turn. Knowing where your income comes from will also help you identify your expenses.
Figure out Your Expenses
Next, you will need to calculate all of your expenses. Take a look at your previous profit / loss and cash flow statements to verify all of the expenses that you incur regularly and ensure that you include them all. Here’s a rule that you should always bear in mind: you can afford, perhaps, to underestimate your income, but not your expenses. Focus on where your money is going out. And, get all the documents to help you understand this better.
Calculate The Difference
By this stage, you will have a list of all of your incomes and expenses. All that is left for you to do is to calculate the difference between the two. This will help you realize how much you’re left with at the end of the accounting period, whether it’s weekly, monthly or yearly. As a business, you want to achieve a profit. If you see that your expenses are running too high, you need to assess what expenses you can cut down.
Plan How To Use Your Profit
When you’ve figured out the difference between your income and expenses, you’ll find either a loss or a profit. Lossmaking is fine in the short-term, may be inevitable in the early stages of a business, but the long-term objective is to achieve sustainable profits. Then you have to assess what you should do with those profits. Think carefully about how much you will be putting back into the business and what you will be taking out as drawings. Keeping a decent amount of retained earnings is essential for every business as a surplus or cushion against future lossmaking or setbacks.
Lastly, you will need to ensure that the budget you make is not something that you look at only once a year. You need to continually reassess the budget versus actual income and expenses in order to measure the performance of your business. Doing so in a disciplined way will help you track progress and ensure that you’re on course to attain your financial goals.
For an impartial view of your business’s unexploited areas, contact Flourish to get your FREE Business Performance Assessment.