You’ve heard the saying: you need to spend money to make money for a reason.
Especially when you’re first starting your business, you’ll have a lot of initial costs that require you to spend in advance of receiving payments.
For example, you buy/lease a truck to deliver goods that will be subsequently billed for and funds collected, build out a retail store before opening the doors for business, hire staff before they can produce goods or offer services, and advertise to generate leads for future sales.
In a reverse situation, a nonprofit typically has a large fundraiser at the beginning of the fiscal year and then hopes sufficient donations are received to cover expenses for the rest of the year.
A budget will help you match these early expenditures with subsequent receipts so you know what to expect, especially with regard to cash availability, and thus you will know where any cash shortages need to be addressed.
Preparing a budget is usually the one time a year that a small business focuses on the year ahead rather than today’s challenges.
You prepare a budget as a tool to help you lead, manage, and control the operations and finances of your business. There may be secondary users of the information, like your staff, who need to understand the company’s goals and progress. And if you have a bank loan, your banker will probably want to see the budget and the actual results.
What is a good budget format?
When you picture a budget, you likely see spreadsheets with many numbers. But more important than the numbers are the assumptions that drive the calculations.
Therefore, the first page of your budget should be these assumptions — what products/services are being sold at what prices and volumes, and what the key drivers are for expenses, like the number of staff and locations, various marketing initiatives, etc.
In essence, you have both an operations and finance budget, and the two are closely intertwined.