The Benefits of Good Budgeting for Your Business

If you’ve been managing your budget on the back of an envelope, you are denying yourself a powerful tool that can make the difference between your small business’ success or failure. A proper expense budget not only serves as a roadmap for how you will be disbursing funds, but it also functions as a reality check by tracking your actual cash outflows against your projections. Good budgeting lets you objectively gauge whether your business strategy is working and highlights areas that need improvement.

Budgeting and Tracking Expenses

For the typical small merchandiser or manufacturer, the first step in creating a proper expense budget is to tease apart the costs of goods sold from your other operating expenses:

  • Costs of Goods Sold (COGS): These are the costs that are directly related to the items you sell. They include the payroll costs of direct labor, purchases of raw goods and/or inventory, purchases of directly related non-inventory items (like lubricants and packing materials), outside services used to help produce or sell your product, as well as other direct costs. Most of these costs are fixed, but the inventory purchases will obviously vary from month to month.
  • Operating Expenses: All the expenses that didn’t go into COGs are budgeted and tracked as operating expenses. These include the payroll for administrative and support staff, non-inventory materials not directly related to the production of goods (such as office supplies), outside administrative services, rent, utilities, travel & entertainment, and loan Everything except utilities can be considered a fixed cost.

The difference between your sales revenue and COGS is your gross income, whereas you have to subtract your operating expenses and taxes to figure your net profit.

Benefits of Tracking Expenses

Here are four good reasons to adopt proper budget tracking:

  1. Streamline areas of overspending: By tracking your actual expenses, you know immediately whether you are busting your budget with overspending, and if so, by how much. You then have two options. The first is to revamp your operations so as to streamline your overspending. This might mean changes to the sources and amounts of inventory and non-inventory items you purchase each month, as well as the size of your payroll, your use of outside services, and the amount you spend on travel & entertainment. The second option is to increase your budget for items that can’t be streamlined. Most businesses use both of these strategies to keep spending in check.
  2. See how your cash flow is affected with fixed vs. variable costs: You have immediate control over your variable costs, but fixed costs take time to change. If you see a lot of cash flying out the door due to high fixed costs, you can start planning ways to lower those costs. For example, you might want to find ways to cut your rent or your payroll. When too much money is being spent on variable costs, you can take steps to cut costs right away.
  3. Analyze spending patterns over time: Budget tracking helps you recognize trends. For example, inflation may increase the cost of your raw materials in a steady, predictable way. If that’s the case, you can incorporate this information into your budget going forward. Budgets also help you recognize seasonal spending patterns, which are extremely important in planning how much cash you’ll need on hand for the upcoming period.
  4. Realize areas of new opportunity for investing time and money: You might find that buying inventory in larger batches lowers your price per unit, but that you’ll need to enlarge your storage facilities to take advantage of this cost break. A budget will help you discover and plan for this and many other opportunities to lower your costs and/or increase your revenues. It can also show you when it makes sense to borrow money to finance your business’ growth.

Convinced? IOU Financial is making it easier to create and track your expenses by offering our free Business Budget Smart Sheet. Simply fill out the short form to download the planner, which is extremely adaptable and easy to use. Don’t delay, because the sooner you organize your budget, the sooner your business will reap the many benefits of tracking your spending!

4 replies
  1. Amanda Drew
    Amanda Drew says:

    I think that you make a good point that you should look at fixed-costs an variable costs and try to find ways to lower them depending on which one is higher. This sort of thing would be especially important for small businesses because every penny counts when you’re small and even more if you’re starting out. It would probably help to find someone who does financial management to help you plan for everything.

    Reply
  2. Sherry Gajos
    Sherry Gajos says:

    I like what you said about how tracking your actual expenses will help you know immediately whether you are busting your budget with overspending and, if so, by how much. My cousin is revamping his small business and wants to make sure they are spending wisely and taking in more than they spend. Thank you for the information about how you can revamp your operations so as to streamline your overspending.

    Reply
  3. Business Cash Flow
    Business Cash Flow says:

    I also agree with what you said. I think that saving money is very important and we definitely need to budget money. I think that budgeting is very important so that you can analyze the money going out and coming in clearly. Thanks for sharing this article.

    Reply

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