What are the Basics of Business Budgeting?

Susan Grindstaff

Business budgeting is not that much different from the budgeting most households do to organize and optimize their cash flow. The basic goal of business budgeting, like all budgets, is to set aside a certain amount of cash to meet expected expenses. Although an overall budget may take the long view, such as a yearly plan or even a five-year plan, most budgets are managed on a monthly basis.

Although business budgets can be made for one year or five year periods, most budgets are managed on a monthly basis.
Although business budgets can be made for one year or five year periods, most budgets are managed on a monthly basis.

Some businesses, depending on their size and revenues, may hire accountants and bookkeepers to develop and manage their budgets. Large corporations frequently have complete departments devoted to budget and budget management. Smaller businesses often have simpler budgeting requirements and usually contract accounting firms on a semi-regular basis.

Planning a budget for a business is sometimes a bit trickier than planning one for an individual or family. Individuals frequently have fixed or predictable incomes and expenses whereas business budgeting often deals with finances that ebb and flow. Business income typically is derived from selling goods or services, and sales often come in cycles. For instances, toy retailers are said to generate more than 80% of their yearly sales during the few weeks leading up to the winter holidays.

Some businesses with sales that come in cycles often get short-term loans from banks to “float” their operating expenses. These loans typically require monthly payments, which should be included in their operating budgets. In some cases, these short-term loans do not require monthly payments, but even so, it is probably a good idea to make a percentage of the loan a part of a monthly budget. In this way, the funds will already be set aside for payment when the loans come due.

Business budgeting in regard to expenditures versus cash flow is sometimes connected to sales whose profits will not be realized for months or even years. For instance, a company may land a contract to produce a large number of items. Many contracts of this sort are ordered with a percentage of payment up front, with the balance to follow on delivery. In this type of situation, often a great deal of cash must be spent before any real revenue is realized. This is another type of situation where a short-term loan may figure into the budget.

The intricacies involved in business budgeting generally require taking a very long look toward future sales and expenses. Most businesses base expected sales and expenses on the previous year’s performance. Some businesses, however, find it beneficial to approach their budget with a “worst possible case” scenario. This type of budgeting involves using the business' worst performing cycle as a basis for budgeting. This type of budgeting may be safer, but could lead to missed opportunities for growth.

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