Every business, small and large, new and established, requires a budget. A budget creates a guideline for income and expenses and provides a way to compare financial goals with reality, to plan ahead proactively, and foresee and correct issues. The budget is drawn from the business plan and expands on the income and expenses foreseen. It can be a task of trial and error, especially for the new or inexperienced businessperson. A functional budget will help guide the business toward financial success, pinpoint trouble areas, and be clear to potential investors or lenders.

The type of business is the first consideration. A business just starting up might want to rely more solidly on a budget and list expenses in a more detailed fashion, to prevent financial issues. Every budget should include these important considerations: what expenses are necessary, how frequently they are due, and how the business will afford (pay for) the expenses. Additionally, how the business is conducted is essential. Is the business run as cash, or by accrual method? Cash means that a sale is not counted until the monies for the transaction are received; accrual is when the sale is counted even before receiving monies.

Mistakes made by small business owners usually include not having a budget; not evaluating all expenses, even small ones; ignoring revenue only to focus on expenses or not ensuring revenue is collected; not having a business plan or failing to tie in the budget and results from the income statement into the business plan’s financial vision; not starting a budget immediately, even before the first sale or expense occurs; failing to monitor the budget; not soliciting input from staff; and not being consistent with the budget. Often, too, listing items of relatively small cost line by line is overdoing a budget and can cause confusion. For example, listing the purchase of every form of office supply (staples, paper clips, paper) separately might be overwhelming and unnecessary.

As stated already, every business needs a budget to have quick reference to business activity. Regular monitoring is important. It does a business no good to have a budget that is not reviewed or adhered to as much as possible; that is like writing in a calendar that is never referenced.

The budget should be realistic and in line with the business financial plan. A budget should be followed and maintained regularly, and staff input is vital in planning for the future. Often, staff can advise management and owners on less expensive ways to run a certain part of the business. For example, there might be cheaper ink cartridges for printers or less expensive hardware available, and the first-line users of these items might be privy to that fact.

A budget is best created today with a computer business or spreadsheet program that can be reused every period. This not only saves time and effort but also creates the consistency required. It is best practice to retain all previous budgets on the computer, but a form can be created or saved with a new file name each time. Files older than a certain period of time can be backed up and removed from the computer to make room for more.

Estimated income from earnings should be placed in one column and expenses deducted from it in another column. Major expenses should be listed. For example, taxes, utility bills, major equipment such as furniture, and salaries all are sensible listings. It is possible and recommended to use formulas in the spreadsheet so that balances are automatically computerized and there is no need to manually add or subtract figures, saving time, human error and costly mistakes.

When in doubt, consult a professional accountant to ensure the business budget is taking the right path.