Budget is one common word thrown around in our personal lives and business. But if you are asked, “what is a budget in business?” would you be able to give a clear and accurate answer? If the answer is no, you are in the right place.
Budgeting is a vital aspect of business planning.
It helps businesses know how much they have to spend and how to spend it.
Budget informs several important business decisions and can help a company cut costs by eliminating unnecessary expenses.
Every business owner needs to know all they can about budgets.
Luckily, this article has got you covered.
Here, you will learn everything about this business topic, from what it means to the various types to its importance and so much more.
To learn all these, you should stick with us to the end.
Meaning of Budget in Business – What is a Budget in Business
A business budget is a plan businesses use to regulate their spending based on income.
It refers to a business’s expenses and revenue estimation over a period.
For instance, a company can make a budget at the beginning of the year that would carry them throughout the year.
Business budgets identify the company’s available capital and then use this to estimate expenses and predict future revenue.
Budgets are significant for every business, regardless of size.
This is because it is an essential financial planning tool that helps a company make the right decisions according to its pockets.
Budgets can be long-term or short-term plans depending on the company’s needs.
This means you can address your long-term and short-term plans with this tool.
Types of Business Budget – What is a Budget in Business
There are two main types of business budgets.
They are static and flexible budgets.
However, apart from these two main types of budgets, businesses also use other types of budgets.
This section of this article will first look at the main types of budgets and then discuss the others.
Static Vs Flexible Budgets
As the name implies, static budgets do not change throughout their lifetime.
Regardless of the changes that may happen during the budget period, the figures and accounts would remain static.
Flexible budgets, on the other hand, are more flexible.
They are flexible enough to accommodate specific changes that may occur during their lifetime.
The figures on flexible budgets can change to accommodate changes in production levels, sales levels, and any other economic change that may arise.
Both static and flexible budgets are important when it comes to a company’s financial planning and management.
With a static budget, a business owner will find it easier to evaluate their budgeting procedures and effectiveness.
Unlike static budgets, flexible budgets make analysing a company’s operations easier.
However, you may find creating and managing static budgets easier because they are more straightforward than their counterpart.
But the type you opt for should be based on your business needs.
For instance, if you operate a more dynamic business with several uncertainties, then flexible budgets would be your best option.
Companies are usually made up of different departments and teams.
Even small businesses often have different areas.
These areas, teams, or departments would have to plan financially too.
This means that they would typically have their budgets as well.
All of these budgets are what are combined to form the master budget.
It is the cumulation of all the budgets from different organisational areas.
Master budgets are very crucial to the overall planning within a company.
Through them, a company’s management could carry out its activities accordingly to reach its goals and objectives.
In big companies, the management is the one to vet and finalise this budget.
Once this is done, funds can be allocated according to the specifications in the budget.
However, if you run a small business, this task may fall to you as the business owner.
In this case, you can create your master budget using spreadsheets.
Budgeting software may be a better option as it would reduce errors to a minimum.
This type of budget estimates the cash that goes in and out of a company over a particular period.
This is an essential type of budget because it helps a company evaluate several important things about the company and its operations.
This includes whether it has enough cash to carry out its operations, whether it is using its funds productively, and if the business is doing the right things to make profits.
To create this budget, you need to consider several factors, such as production levels, sales forecasts, and so on.
You would also have to estimate your receivables and payables.
Operating Budget – What is a Budget in Business
This highlights a company’s expected revenue, as well as the expenses for the expected revenue over a particular period.
It is like a profit and loss statement.
So, it covers things like variable, fixed, non-operating, and capital costs.
Even though it is a summary report, operating budgets often have relevant details in each line.
This way, a company can analyze whether or not its spending is in line with its plans.
Most organizations prepare this at the start of every year.
However, the document keeps updating annually, say every 3 months.
Labor Budget – What is a Budget in Business
If you want to hire employees in your business, you need this budget.
This budget helps a company plan its employees’ payroll.
When making this plan, you have to consider your company goals and the number of employees you need to reach these goals.
You would then use this information to plan accordingly.
If you also take on seasonal workers in your company, this document will help you allocate the funds for them.
This is used to help a company determine the amount of money they will need at different times to carry out their short and long-term goals.
It covers things you mostly find on balance sheets, like the company’s liabilities, assets, and stakeholders’ equity.
Therefore, you can use this document to understand a business’s health.
Importance of Business Budget – What is a Budget in Business
Budgeting is a challenging task.
You have to pay close attention to details, spend time calculating figures, and make the correct estimates and decisions.
Now, you are considering whether it is worth the stress.
If that is going through your mind, then budgeting is worth any effort you would put into it.
It is imperative and will benefit your business in so many ways.
If you are still doubting the importance of budgeting in business, the following reasons may convince you.
Ensures Availability of Resources
One of the primary purposes of a business budget is to ensure that a company has the resources it needs to meet its objectives and goals.
Budgeting allows a company to plan its finances and determine which area needs more resources and where it can cut down on some expenses.
By properly allocating resources, it makes sure that there is always enough for the smooth running of the business.
Maximizes the Use of Resources
A company’s resources are limited.
Regardless of a company’s size, it cannot have infinite resources.
Therefore, companies always seek the best ways to maximize their resources.
And budgeting goes a long way in making this possible.
Since a company can analyze the areas that need the most resources and where it can make some cuts, it won’t be wasting its already limited resources.
Instead, it would optimize the use of such resources in areas where they are most needed.
Helps you Prioritize – What is a Budget in Business
One of the offshoots of budgeting is that it helps a company prioritize.
Companies often have several projects and initiatives that they would like to try out.
While this is great, a company can’t just carry out every project it wishes to embark on.
A project may seem like a great idea but, in the end, may not give the expected result.
This is why prioritizing is important.
It helps organizations figure out the most critical projects that best align with the company’s goals and values and would bring in more ROI.
And budgeting helps a company prioritize because it forces business owners to determine and evaluate the usefulness of a particular initiative or project.
Since a company wants to use its limited resources appropriately, it will be forced to evaluate any project properly before it embarks on it.
Helps Set and Evaluate Company Goals
Budgeting is not all about allocating resources for expenses.
It also helps companies determine how much they spend to meet their goals.
This is why you can use your budgets as a yardstick to set organizational goals.
Budgeting can also analyze previous goals and help you develop better strategies to achieve said goals.
For instance, you estimated getting at least 500 new customers in your last month’s budget, but then you made just 300.
You can analyze this situation and then think of what may have prevented you from attaining the goal.
You may notice that allocating more resources to a particular area can help you reach your goal the following month.
Can Help You Get Investors – What is a Budget in Business
If you’re starting up your business or you wish to expand your business, you may be looking for funds.
There are so many sources for businesses to get the financing they need, but most times, convincing these sources that your business is worth investing in can be an issue.
Having a business budget, however, can make it easier for you to get investors interested in your business.
Investors want to ensure the overall health of any business they want to invest in.
They would typically ask for documents that will help them analyze the business’s financial performance.
And your budgetary data can come in handy at this point.
It would help prove that you can handle your company’s finances and allocate funds and resources.
Business Budget Components – What is a Budget in Business
If you have never created a budget (perhaps you are a new business owner or just haven’t seen the importance of budgeting) and now you want to but do not know where to start, this section is for you.
The best step to learning how to create a business budget is to understand the different parts that make up the budget.
Knowing this would make you know what to include in your budget to ensure that it tackles all the target areas that it should.
Therefore, below are 6 essential components a business budget must have.
Estimated revenue refers to the money you expect to make from the goods or services you offer.
For example, let’s say you run a massage therapy business, and based on experience, you expect to have 50 clients in a month.
Your estimated revenue is the cost of the services you would render to the 50 clients.
The estimated revenue comprises the cost of services rendered or goods sold and your sales forecast.
If you have been operating your business for more than a year, then estimating your revenue using your experience would be easy.
However, making this estimation may be more difficult if you run a new business.
This does not mean that it can’t be done, though.
You can try to estimate revenue for your new business by checking your competitors’ revenue.
You can then use this data to estimate a figure for your business.
One thing you should avoid, whether you are operating a new business or not, is being unrealistic and overestimating.
When estimating revenue, ensure you stick to facts and not just make up unrealistic figures.
Variable costs are operational costs that can change due to changes in a business.
This means that business success or failure can affect these costs and cause them to change.
For instance, your business has a product that starts doing so well.
Now, you need to produce more of this product to meet the increase in demand.
So, you have to buy more raw materials, employ more workers, and optimize your distribution process.
You will have to spend more money than you would typically to put all these in place to meet demand.
Therefore, this would count as variable costs.
Fixed costs are the exact opposite of variable costs.
Where variable costs would change depending on a business’s operations, fixed costs remain the same regardless of how well or poorly a company is doing.
Fixed costs include rent, mortgage, employee salaries, utility bills, etc.
Because fixed costs always remain the same, allocating the funds to cover them in your budget would be easier.
Cash flow is the amount that comes out and goes into a business.
That is your revenue and expenses.
Cash flow is an important component that your budget should contain because it will help you analyze your previous revenue and expenses.
You can then use this data to forecast your budgeting period.
You shouldn’t just pay attention to the amount of cash coming and going out of your business.
But you should also consider when money comes and goes out of your business.
This would help you notice your demand pattern.
You would be able to spot your dry and peak seasons.
This way, you can do your budgeting accordingly.
One-Time Expenses – What is a Budget in Business
Sometimes, some unexpected situations you would need to spend money on may arise.
For example, your office printer may get faulty, and you’d have to replace it.
These situations are often unexpected; therefore, estimating them won’t be possible.
However, this does not mean you won’t make plans for them.
Your budget should have a section that can cater to these one-time expenses in case they happen.
This way, when something unexpected happens, you have cash somewhere to fall back on.
Profit – What is a Budget in Business
Finally, your budget should consider your profit.
Your profit is the amount of money you have left after subtracting all your expenses from your revenue.
If you made more profit than the previous year, then it means that your company is growing.
In this case, you may need to invest some of your profit into some business regions to generate more revenue.
This is why you should consider this factor when budgeting, as it would allow you to evaluate your profit and determine what percentage of it should go back into the business.
Conclusion on What is a Budget in Business
Budgets are business plans that companies use to regulate their spending depending on how much the company is spending.
The two important factors for budgeting are estimated revenue and expenses.
The estimated revenue informs the amount of money the company would spend in different areas of its processes.
Budgeting is very important for any business, regardless of its size.
Therefore, even though you run a small business, you must prioritise budgeting.
This will help you to properly allocate your resources and ensure that they are readily available for the smooth running of your business.
It doesn’t matter if you have not been budgeting before now.
Thankfully, it is never too late to start budgeting in your business.