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A budget is a snapshot of where your business should be headed financially. It includes forecasts of income and expenses based on historical data and trends.
Revenue
Revenue is the top number in a company’s profit and loss statement and the source of funds that support all business operations. Revenue includes sales, investments, and other sources of income.
Forecasting and monitoring like the expertise of Mark Hirschhorn yearly and monthly revenue trends can help you spot seasonality, identify key market insights and develop strategies to increase sales or lower costs during slow times.
Budgeting for a business can be challenging and requires regular tweaks as circumstances change. It would help if you monitored actual revenue and expenses every month, especially during peak periods. This will ensure your business has enough money to cover costs and meet your revenue goals. This data can also be helpful when negotiating with suppliers and paying taxes. The budgeting process can also inspire you to find new ways of achieving success.
Fixed Costs
Understanding the total cost of running your business is critical for setting pricing goals, maintaining positive cash flow, and increasing profit margins. Your business’s operating expenses are fixed, which remain the same from month to month, like rent or employee salaries, and variable costs, which change according to sales and production levels. One-time expenses, such as purchasing equipment and facilities or handling a significant security breach, are also necessary.
Start by calculating all your business’s monthly expenses and listing them in a spreadsheet. You can use historical numbers and trends to predict future expenses reliably. Once you have all your fixed costs compiled, subtract them from your revenue to find your business’s net income.
Variable Costs
Variable costs increase or decrease based on business activity, such as the cost of raw materials or sales commissions. A key element of business budgeting is understanding these costs, which can be essential to pricing your products.
Variable costs vary month-to-month based on your production or sales activity and include usage-based utilities, shipping expenses, and sales commissions. These are a big part of the reason it is hard to predict a business’s monthly payments – but they are still something you should account for when creating a budget. You may also have one-time fees, such as purchasing equipment or facilities, hiring a consultant, or handling a security breach. These are typically less frequent but must be factored into your overall budget.
Profit
A business budget is crucial to help you make sound financial decisions. When you use it to monitor spending and income, you can detect problems like overspending or revenue that need to catch up with expenses.
To calculate profit, start with a gross total of the revenues you expect to see in the chosen period, then subtract all expenses and production costs to arrive at your net income. This number is often called the ‘bottom line’ and is essential to predicting future profitability.
An operating budget is a list of all the expenses and revenues your company expects to see over a specified period, such as an entire year. It includes both fixed and variable costs. It also helps you plan for seasonal fluctuations and identify ways to increase profits.
Cash Flow
While profit is an important metric to monitor, cash flow is equally crucial. A budget will help you estimate the amount of money coming in and going out of your business for a given period.
A well-drafted budget will include all expenses, including fixed, variable, and one-time costs. It will also have estimated incoming revenue like sales, tax payments, loan proceeds, and interest income.
With the help of your budget, you can determine where there is room for improvement in decreasing spending or growing revenue. It will also come in handy when applying for loans or seeking investors. A history of detailed, accurate budgets will also come in handy when creating a financial forecast to predict future performance.
