Money is crucial to get your business up and running. Nothing is possible without money backing it up, and your business will cease to exist if there is no money. Therefore, you need to ensure your funds are used appropriately.
Your finances enable you to fund your daily business operations, such as paying salaries, acquiring raw materials, and payment of bills.
If you want to ensure your procurement processes run smoothly, you must budget. It will help you allocate and manage your funds and avoid going broke.
So, what is a budget, its importance, and how do you create one? This article discusses budgeting 101. We will cover:
What is a Budget?
What is the Importance of a Budget?
How to Create a Budget
What is a Budget?
A budget is a plan you create to dictate how you will spend your money for a certain period.
Budgeting is balancing your expenses with your income. It details the amount of money the business will make, how you will use it, and on what. If you don’t get it right, you may spend more than you make, creating a problem for the business.
Many businesses don’t realize they spend more than they earn, gradually sink deeper into debt, and even shut down their operations.
What is the Importance of a Budget?
Below are some of the reasons why your engineering start-up needs a budget.
It prevents you from overspending, preventing you from falling into business debt
It helps get prepared for future emergencies
It can help you achieve your business goals and objectives
It helps to curb bad spending habits
Now that you know how important budget is, let’s go through how to create one.
How to Create a Good Budget
While creating a budget seems overwhelming, the process is not that difficult. Below are tips on how to create a financial budget that will help you achieve financial milestones. You should also go through examples of budgets to get an idea of how they look.
Determine Your Net Profit
Net income is the amount you earn after deducting taxes and expenses. Therefore, determining your net income gives insight into the financial health of your business. If you use the gross income, you may find yourself budgeting for funds you don’t have.
Your real profits is the total revenue minus the cost of goods, operations, and taxes.
Make a Budgeting Plan
A good financial budget should cover all your business needs and wants.
Below are budgeting plans you can choose from;
Envelope budgeting plan
This plan lets you physically portion out your net profit toward different spending categories.
How does it work?
You take a few envelopes, write a specific expense category on each and then put the money you plan to spend on those things into the envelope. In addition, you can adopt a digital method like spreadsheets and apps like Mvelopes and Goodbudget.
Zero-Based Budgeting Plan
This plan allows you to allocate all your money to expenses, savings, and debt payments. The goal is to ensure your income minus your expenditures should equal zero.
This plan encourages you to use every penny of your monthly income. You can build your zero-based plan with apps like Goodbudget or Spreadsheet.
This budget plan is key to saving for emergencies and the future.
Value Proposition Plan
It is a plan that ensures everything included in the budget delivers value to the business. It aims at avoiding unnecessary expenditures.
Activity-based Budgeting Plan
It’s a plan that determines the number of investments required to support the expenses of your business.
You’ll need to determine the activities that need to be undertaken to meet the sales and then determine the costs of carrying out these activities.
Track your progress
Keeping track of your expenses may seem like a lot of work. However, understanding why it’s important to track them can help you successfully commit to the trend and become more aware of your spending.
Keep a record of your expenditures to ensure you know where your money is going.
You can use online budgeting and savings tools like; EveryDollar, Goodbudget, and Personal Capital.
Use Check Off System
This is where you make arrangements with an accountable partner or online support group to pay for bills automatically. This way, you cannot spend money on an unallocated expense, and the stress of tracking payment is off your hands.
The best thing about this method is that it will ensure you’re held accountable for the choices that affect the budget.
Review Your Budget Regularly
There will be moments when your business will be booming, and there will be moments when sales are low, and these can affect your spending. To overcome this, you’ll need to keep reviewing your budget to accommodate the trends. For example, when your industry is experiencing a new trend, you’ll need to allocate money to meet the new demands.
Key Takeaways
Your budget is essential to your business survival
You need to budget based on your income after deductions (cost of operations) and taxes
You need to use the most appropriate type of budget for your startup
Divide your expenses between needs, wants, savings, and future expenses
Conclusion
Failing to plan ultimately leads to failure. Create a financial budget to help you in the financial management of your business.
You can even hire a business accountant to organize and update all financial records and transactions in the business to ensure you’re on the same page with your budget and keep track of it.
About the Author:
Bio: Riley Scott is an experienced writer in business, personal finance, supply chain, and procurement. He has a keen understanding of the inner workings of businesses and is able to communicate financial concepts in a way that is easy for everyone to understand.
Click here if you would like to read more of his articles.
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