Texas Legal Entities
Budgeting
When a small business is started, preparing a budget without a history on which to base estimates is a daunting task. A new business may have an idea of what it hopes to earn and how much it could cost to earn it, but does not have the benefit of real numbers. Broad estimates of income and expenses may get a budget done quickly but this broad estimate won’t create a tool to gauge performance or manage a business. It is a much better idea to start at the bottom of a budget and work up.
Some people do not see the importance of a budget for a new small business. This is not a good decision as every small business needs a budget. A well-run household operates on a budget, even if it isn’t written.
A business is in business to make money. A budget will show how do to just that. It is an extension of a business plan and business strategy and will help to put both into practice. It quantifies a business plan in financial terms and gives a sense of reality to conceptual ideas. A well-prepared budget will serve as a baseline and an important reference point for guiding a new business by providing an essential framework for the start-up and initial operating stages.
Budgets should be based on as many solid numbers and as much actual data as possible. This data should be obtained through research, assembling and organizing documentation and information, and getting quotes. Building a budget from the bottom up reveals that there are more numbers that are known or can be found out.
Starting at the bottom means going to the lowest level of detail, the building blocks made of concrete information that can be put together to construct the various different line items like:
- Revenues
- Cost of sales
- Advertising
- Rent
- Utilities
- Maintenance
- Other overhead expenses
The building blocks are basically quantities, hours, prices, and rates. Rather than budgeting total income and expenses as an amount per month, the numbers should be broken down to figures on their component parts.
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