Business Budget Definition and Example

Business Budget Definition and Example explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Business Budget Definition and Example

Definition:

Budget is a plan that outlines an organization’s financial and operational goals. So it may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans.

The budget is an essential part of a business plan when starting a new business. Once a business is established, budgeting becomes a regular task that normally occurs on a quarterly and/or annual basis, where the past quarter or year’s budget is reviewed and budget projections are made for the next three or even five quarters or years.

The basic process of planning a budget involves listing the business’s fixed and variable costs on a monthly basis and then deciding on an allocation of funds to reflect the business’s goals. (For more on fixed and variable costs, see Breakeven Analysis.)

Businesses often use special types of budgets to assess specific areas of operation. A cash flow budget, for instance, 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.

Why Does Your Business Need a Budget?

Without a budget you may not know how your business is performing. A 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
  • improve efficiencies in other ways

A comprehensive budget will also be a definite requirement for obtaining business loans from financial institutions or seeking equity funding from investors.

Budget Expenses

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 land line 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 costs that increase with activity – for example, electricity, gas, or water usage
  • Raw materials
  • Shipping and delivery costs
  • Advertising (can be fixed or variable)
  • Maintenance and repair of equipment

And if you’re planning on starting a business, planning a budget plays an important role in determining your start up and operating costs. The Financial Plan Section of the Business Plan provides information on calculating your start up and operating expenses.

Business Budget Template Example

The following example demonstrates a simple business budget template. The example expenses listed are common to most small businesses. You can use and modify the template as required to suit your own business (select, cut & paste into a word processor or spreadsheet as required):

Acme Corporation 2016 Budget
IncomeActualBudgetDifference
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
ExpensesActualBudgetDifference
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

 

Making Budget Estimates

It is important to be realistic with your budget projections, particularly if you are starting a new business and have no previous year’s budget figures to guide your estimates. 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 are often 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 expense equipment
  • an increase in rent
  • hiring employees
  • an increase in competition

See also:

10 Ways to Cut Business Costs

3 Methods of Sales Forecasting

Cash Flow Analysis

Business Budget Definition and Example Conclusion

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