Budgeting for Small Business, Introduction #2

A budget serves two basic purposes: (1) it makes you plan for the future, and (2) it provides a benchmark by which you can chart the progress of your firm by comparing budgeted figures to actual figures as the year progresses.

Budgets are generally created for income and for cash flow. Income is the profit or loss for a period (regardless of whether cash from sales is received). Cash flow is your company’s actual inflow and outflow of cash.

Below are the steps normally taken in creating a budget for a small business:

1. Sales Revenue Budget - this is the revenue you expect to make during the period from selling your products or services.
2. Production Budget - these are the expenses that are directly associated with producing your products or services.
3. General and Administrative Budget - (sometimes called an Overhead budget). These are the expenses that cannot be directly tied to producing a product or service, such as non-production related payroll, depreciation, sales and marketing, rent, insurance, and bad debt.
4. Capital Expenditure Budget - this is where you estimate the expense for the major purchases, such as machinery or automobiles, you plan to make during the period.
5. Interest and Tax Budget - these are all the revenues and expenses that are not directly related to the operations of the company, but do have an effect on the income or loss used for tax purposes.
6. Cash Flow Budget - this is where you estimate the actual cash you will receive and the actual cash expenditures that will be made during a certain period.

A budget usually covers a calendar year, but your company circumstances may cause you to create a budget covering a shorter or longer timeframe. Additionally, most budgets are broken down into monthly increments within the period covered by the total budget.