What Is a Business Budget?
Definition & Examples of a Business Budget
A business budget estimates an organization's revenue and expenses over a specific
period of time.
Learn more about how a business budget works and get an example of one.
What Is a Business Budget?
A business budget provides an accurate picture of expenditures and revenues and
should drive important business decisions such as whether to increase marketing,
cut expenses, hire staff, purchase equipment, and improve efficiencies in other ways. It
also outlines your organization's financial and operational goals, so it may be thought of
as an action plan that helps you allocate resources, evaluate performances, and
formulate plans.
What are the basics contents of Budget?
1. How and why do managers use budgets? – To express
its plan and how well it has achieved its budget.
2. How are budgets developed – strategic planning and
key strategies
3. Who is involved in the process ( Is this authoritative
or participative budget)
4. What is the Starting point for developing budget –
Use prior’s year budget
5. What are the benefits of budgeting (allow planning,
coordination and communication, benchmarking)
6. Master Budget
- Sales budget
- Production budget (Material, labor, manufacturing
overhead)
- Operating expenses
- Budgeted Income Statement
- Financial Budget (Capital Expenditure, Cash
Budget, budgeted Balance Sheet)
7. Budget type (Activity based Budgeting, Zero
budgeting, Rolling Budgeting, incremental budgeting)
How a Business Budget Works
The basic process of planning a budget involves listing your business's fixed and
variable costs on a monthly basis and then deciding on the allocation of funds to reflect
goals.
Businesses often use special types of budgets to assess specific areas of operation.
A cash flow budget, for example, projects your business's cash inflows and outflows
over a certain period of time. Its main use is to predict your business's ability to take in
more cash than it pays out.
Most businesses have fixed costs that are independent of sales revenue, such as:
Building or office eases or mortgage costs
Loan payments (if using debt financing)
Insurance
Vehicle leases (or loan payments if the vehicle is purchased)
Equipment (machinery, tools, computers, etc.)
Payroll (if employees are on salary)
Utilities such as landline phone and internet charges
Variable costs increase or decrease according to the level of business activity.
Examples include:
Contractors' wages or commissions (for salespeople)
Utilities such as electricity, gas, or water that increase with activity
Raw materials
Shipping and delivery costs
Advertising (can be fixed or variable)
Maintenance and repair of equipment
It is important to be realistic with your budget projections. If in doubt, be conservative
and overestimate your expenses and underestimate your revenues. It is particularly
difficult if you are starting a new business and have no previous year's budget figures to
guide your estimates. In this case, it is typically much easier to estimate expenses than
revenues.
As the budget year progresses the estimates should be updated monthly with actual
figures, enabling you to check the accuracy of your forecasts. Note that there often are
radical differences between actual and projected revenues and expenses due to
unforeseen business circumstances and/or changing business and economic cycles,
such as:
Gaining or losing a major client
Having to purchase or replace expensive equipment
An increase in rent
Hiring employees
An increase in competition
Changes in the tax code
Do I Need a Business Budget?
If you own a business, then you need a budget.
A budget is an essential part of a business plan and is necessary for starting a new
business. It plays an important role in determining your start-up and operating costs.
Once your business is established, budgeting becomes a regular task that normally
occurs on a quarterly or annual basis.
Without a budget, you may not know how your business is performing.
Having a comprehensive budget is a requirement for obtaining business loans from
financial institutions or seeking equity funding from investors.
Example of a Business Budget Template
A simple business budget template includes expenses common to most small
businesses. You can use and modify a template as required to suit your own business,
filling out your own information where applicable. Your completed budget might look
something like this:
Income Actual Budget Difference
Operating Income
1st Quarter Sales $34,300.00 $35,000.00 -$700.00
2nd Quarter Sales $35,250.00 $35,000.00 $250.00
3rd Quarter Sales $31,300.00 $30,000.00 $1,300.00
4th Quarter Sales $27,100.00 $25,000.00 -$900.00
Total Operating Income $127,950.00$125,000.00$2,950.00
Non-Operating Income
Interest $650.00 $600.00 $50.00
Other $1020.00 $500.00 $520.00
Total Non-Operating Income $1,670.00 $1,100.00 $570.00
Total Income $129,620.00$126,100.00$3,520.00
Expenses Actual Budget Difference
Operating Expenses
Rent $12,000.00 $12,000.00 -
Insurance $2,500.00 $2,500.00 -
Electricity $1,150.00 $1,100.00 $50.00
Gas $1,250.00 $1,100.00 $150.00
Internet $600.00 $600.00 -
Phone $2,200.00 $1,900.00 $300.00
Travel $2,300.00 $2,100.00 $200.00
Salaries, Wages, and Benefits $66,000.00 $60,000.00 $6,000.00
Advertising $1,200.00 $1,000.00 $200.00
License Fees $500.00 $500.00 -
Office Supplies $430.00 $500.00 -$70.00
Shipping and Delivery $850.00 $1,000.00 -$150.00
Maintenance and Repairs $1,100.00 $1,500.00 -$400.00
Other $800.00 $1000.00 -$200.00
Total Operating Expenses $92,880.00 $86,800.00 $6,080.00
Non-Operating Expenses
Smartphones $1,800.00 $2,000.00 -$200.00
Tablets $1,500.00 $2,000.00 -$500.00
Total Non-Operating Expenses$3,300.00 $4,000.00 -$700.00
Total Expenses $96,180.00 $90,800.00 $5,380.00
Net Income $33,440.00 $35,300.00 -$1,900.00
Many budgets also include actual figures going back several quarters or years as a
comparison for what is being projected for the upcoming quarter or year.
Most accounting software has options for budgeting/forecasting.
Key Takeaways
A business budget estimates an organization's revenue and expenses over a
specific period of time and drives important business decisions.
Businesses often use special types of budgets to assess specific areas of
operation.
Budgets help companies understand start-up and operating costs and track
performance.
Most budgets include fixed and variable income and expenses.
