Budgeting For Businesses — Tips For Building An Effective Budget
Creating a reliable and accurate budget is one of the most important aspects of running a business. In fact, if you can’t create an accurate budget and your costs outweigh your revenue, you don’t have a company.
The following are three key tips for building a budget that will work for your business:
Master Your Cost Breakdown:
It goes without saying that knowing your costs is important. However, familiarizing yourself with the various types of costs is vital for understanding how to factor your costs into your budget. This section outlines the four key types of costs to keep in mind while budgeting for your business: fixed costs, variable costs, one-off costs, and sunk costs.
Fixed Costs refer to more permanent costs that do not fluctuate. In other words, you pay a fixed cost at a fixed amount, and that amount will not change even as your workload changes. One of the most common examples of a fixed cost is rent.
To illustrate, if you own a store and your rent is $10,000 per month, you will pay $10,000 each month until your lease is up, regardless of what you sell. You will pay $10,000 if you only sell one item the whole month, and you will pay $10,000 if you sell out your store. The bottom line is that fixed costs do not change.
Variable Costs refer to costs that change month to month. One of the most common examples of a variable cost is labor. Your labor costs change each month depending on how many people you employ.
For example, if you employ six people for 1,000 hours in October and three people for 500 hours in November, your labor costs in October will be greater than in November.
While fixed costs are generally easy to forecast in a budget, variable costs can be a bit more challenging. To illustrate, predicting the amount of labor you will need each month can be difficult because that could depend on your future monthly output, which may also be hard to predict.
One-Off Costs are fairly self explanatory — they refer to costs that only occur once. Examples of one-off costs include moving offices, paying for a flight to a conference, or anything else that is not recurring. Sometimes unique business opportunities arise that require one-time spending; these would be considered one-off costs.
One-off costs can be difficult to forecast in a budget because various opportunities or urgent needs sometimes arise that cannot be predicted. It is best to air on the safe side and include room in your budget for unforeseen circumstances.
Sunk Costs refer to past expenditures that cannot be earned back. For example, if you invested money in a product that you thought would succeed but didn’t, that money is gone.
Do not create your budget assuming you will make that money back. Many businesses make the budgeting mistake of assuming past failures will turn themselves around, only to find themselves over budget in the future. It is crucial that you recognize a sunk cost when you see it and move on.
Choose The Best Budgeting Template:
Staying organized while creating your budget is important to ensure you budget accurately. Here are three of our favorite budgeting templates:
- Google Sheets: Believe it or not, one of the best budgeting templates is available on Google and it’s easy to use.
- Smartsheet: If you don’t like the Google templates, try Smartsheet, which also offers free and easy-to-use budgeting templates. More advanced templates are available for a fee as well.
- Vertex42: If you like Excel spreadsheets, check out Vertex42. It has lots of budgeting template formats using Excel, so you should be able to find something that works for you.
Make Bookkeeping A Priority:
As mentioned above, you can only create an accurate budget if you have a solid understanding of your costs. And you can only truly understand your costs if you keep up-to-date on your bookkeeping and ensure everything is recorded accurately. This may seem obvious, but so many companies overlook their bookkeeping, and their budgeting suffers as a result.
We can help with your bookkeeping and budgeting to ensure you forecast properly and are on the right track from an accounting perspective. If you need budgeting assistance, please don’t hesitate to reach out. Krowne Certified Public Accountants offer unparalleled financial guidance and professional services specifically tailored to our client’s needs. Please feel free to reach out to us at Krowne Certified Public Accountants by filling out the form on our contact us page or via phone at 818-831-6075. We would love to discuss your situation and help you grow. We look forward to hearing from you.