Companies that want to expand their business in an organized manner need to keep in mind the need for planning and a clear vision of their finances. Thus, the business budget becomes an indispensable ally in carrying out these tasks.
After all, buying more equipment or renting a new building without knowing how to pay for it harms the company’s financial health. The tool allows managers to look to the future and plan their success down to the smallest detail.
In practice, a business budget allows you to organize your investments and financial strategies for the next year, semester or quarter. It also helps you set clear and smart goals for your money.
In this guide, you will learn about the importance of a business budget , 7 steps to create one, and check out other common questions on the subject. We hope you enjoy reading!
What is a business budget?
A business budget is a document or tool that records all of a company’s costs, revenues and information for a given period. It is a fundamental instrument for financial organization , and is prepared monthly or annually as part of the business’s strategic planning .
The primary goal of a business budget is the same as for any business: to spend less than you earn and increase your profits. But there are several ways to achieve this goal, for example:
- Reduce costs in certain areas;
- Invest in technologies and people;
- Use new sales strategies, among other possibilities.
Therefore, it is important to prepare a detailed document and include an estimate of earnings and expenses for the next year, semester or quarter, for example. This way, you can have better financial control , set goals based on sales projections and closely monitor the business’s evolution.
Importance of preparing a business budget
Just as consumers consult their family budget to decide on household expenses, entrepreneurs need to evaluate the business budget to make any decision involving money.
With this document, you can diagnose the company’s finances based on past data, and you will also have a reference to monitor the business’s growth. This way, you can make more reliable estimates and adjust resource allocation when necessary to put your plans into practice.
You can use your business budget as a basis for planning the costs of launching a new product or service, for example. You can also use it to estimate new hires, find solutions to reduce administrative expenses, think about strategies for attracting investment, and many other actions.
Main types of business budget
A business budget can be prepared using different models, depending on the specificities and objectives of each company’s financial management. To determine which format is ideal for your business, learn about the main types:
Historical budget
This model, as its name suggests, is focused on past information to support budget planning.
To do this, a specific period is set to analyze your expenses, income and costs. From there, a percentage of growth or reduction is established, according to the goals of the defined financial planning.
Consolidated for a long time in companies, this method is considered more conservative and stands out for its agile implementation.
Here, the main point of attention is not to encourage excessive and even unnecessary spending to achieve better results, which can end up inflating the company’s budget.
The ideal is to collect feedback from different areas of the business and establish the most relevant points for improvement so as not to harm investments.
Zero-based budgeting
Unlike the previous model, this type of budget disregards past expenses. Of course, the focus is also on avoiding waste, but from the perspective of managers.
In zero-based budgeting, each internal sector needs to break down possible expenses and prepare the business budget, which refers to each cost center and starts from scratch , as the name also indicates.
Its biggest benefit is taking advantage of the managers’ expertise in relation to their own department, obtaining a more realistic analysis of their real budgetary needs.
Activity-based budgeting
The activity-based business budget is carried out based on the real cost of a product or service and the charges that each activity represents when carried out.
Using this model, it is possible to predict the resources needed to meet a given demand. In the event of an imbalance, the demand itself, the processes or the resources can be adjusted.
In other words, organizational strategies go hand in hand with internal operations, facilitating decision-making and making the business more competitive.
Whether in price adjustments, production, cost review, marketing, among other points of improvement, this format focuses on achieving operational balance between the necessary and available resources.
Matrix budget
Also called matrix expense management (MDM), this model offers an objective view and cross-analysis of the business budget.
The method is divided into two groups. The first is the package method, which represents the company’s set of investments, including expenses, revenues, fixed and variable costs. The second is the entity method, which refers to cost centers, such as units and departments.
Its preparation starts from a cross-control, in which all expenses are managed by two people. From this, a breakdown is made, in which all expenses are specified at the activity level.
Finally, systematic monitoring of results is applied in order to adopt measures to correct bottlenecks and compare targets on an ongoing basis.
Rolling budget
Finally, there is the rolling business budget. Its purpose is to improve upon other budgeting models by setting specific time intervals.
This is because, instead of relying on annual planning, the analysis is done continuously, in order to keep the information and calculations always up to date. The frequency can be one, four or six months.
Through this budget, managers can always stay well informed about the financial situation and respond more quickly to unusual events.
How to make a business budget in 7 steps
Making a paper business budget is quite a chore, but planning your finances each year, semester, or quarter is all about creating one. For that reason, here are the steps you can go through to create your paper.
1. Start with a financial diagnosis
The first step in preparing your business budget is to diagnose the company’s financial situation.
To do this, you can review reports from the previous year or the last few months. From these, you can analyze indicators such as sales volume, profit or loss, costs and expenses , revenue, tax expenses, etc.
It is also important to check in which periods the company performed best and the possible influence of seasonality on sales. At the end of the analysis, you should conclude whether the business is evolving in the expected direction or whether changes to the budget are needed.
2. Set goals for the period
As we have seen, a budget is a planning tool . And to plan, you need to know where you want to go. Therefore, the next step is to define the business’s financial goals and objectives .
3. Make a sales projection
Sales projection is an estimate of how much the company expects to sell in a future period. It serves as a basis for projecting other important elements of the business budget , such as costs, expenses and investments.
To do this, you must consider all of the company’s sales channels (physical and online stores, social networks, resellers, representatives, etc.) and all of the products/services in the portfolio.
Then, you need to calculate the average sales volume for each item and channel, estimating how much the company should sell in the next year (or whatever period you want) based on current history.
4. Estimate other revenues
It’s crucial to include in any additional revenue anticipated for the time frame in addition to estimating the amount you should make from sales.
Naturally, most of a company’s revenue comes from its core business, whether it’s selling products or offering services . But it can also receive money from financial investments, leases, copyright and image fees, among other additional income.
5. List all costs and expenses
Once you have a good revenue projection, it’s time to list all the expected costs and expenses in your business budget. There are four main types of expenses in a business:
- Fixed costs: recurring expenses that do not change according to production volume, such as office rent and payroll ;
- Variable costs: expenses that vary according to the production volume, such as raw materials for manufacturing products and taxes paid on sales;
- Fixed expenses : administrative costs that do not vary according to sales and distribution, such as office property tax, loan payments and cleaning and maintenance services;
- Variable expenses: expenses that increase or decrease in the same proportion as sales, such as sales commissions.
At this stage, you should account for all of these expenses and make an estimate for the following year. If you are creating a general budget for strategic planning , you can divide the costs by area of the company. This makes it easier to organize.
Remember that preparing a business budget is a good time to plan for cost cutting or reduction. If you see any opportunities during this process, it could be another way to improve your company’s finances.
6. Calculate fixed assets
It is also important that the business budget includes the company’s fixed assets , that is, its permanent assets and rights that guarantee its operation.
There are basically two types of assets:
- Tangible assets: these are tangible assets, that is, physical goods such as furniture, equipment, real estate, machinery, tools, etc.
- Intangible assets: These are abstract properties that cannot be touched, such as legal, financial or economic rights. Some examples are the company’s brand, product and technology patents, copyrights and financial securities such as shares and contracts.
7. Plan your investments
If one of your company’s goals is to grow, investments need to be present in your business budget.
You can plan to invest in opening a new branch , purchasing new equipment, expanding your workforce, implementing new technologies, among other projects.
In general, companies can invest from their own capital, allocating part of their net profit to business expansion projects, or seek external capital for this purpose.
In the second case, there are two alternatives: seek credit from banks and financial institutions, taking on debt, or seek investors interested in becoming shareholders in the company.