What is a budget?
A budget is an estimation of expenses and income over a certain period, usually monthly, quarterly or yearly. It allows a business to plan out expenses, reach business goals and anticipate any operational changes as needed to support the business. A budget helps a business understand its operating costs and can be used to track performance.
Why budget is important
Most companies have several items they must pay consistently—daily, weekly, monthly, quarterly, yearly or otherwise—to maintain business operations. Budgets are important to ensure expenses are covered so the company can prevent any long-term debts. Without a budget, a business may experience any number of consequences, up to and including the dissolution of the company.
Some of the items that a business should budget for include:
- Payroll: This can include everyone at the company, even the owner if they currently take a salary.
- Rent: Most companies lease an office, a warehouse, a brick-and-mortar location or other space where it conducts business.
- Utilities: Along with the lease of space comes utilities such as electricity, water, internet and phone.
- Insurance: Insurance may include general liability insurance, property insurance and coverage for unemployment and workers’ compensation.
- Professional services: A company may have expenses to keep the company operational. These can include IT services, printer repair expenses, a tax professional and even a cleaning team.
- Advertising: It’s common for a business to engage in some type of advertising to increase sales or brand awareness. Advertising costs money and may very well be a regular expense that a company is responsible for.
- Loans: A company may have loans it has to repay for opening the business, gaining capital from investors and other financial obligations.
With a proper budget in place, a business can anticipate expenses, plan for major increases in costs and even make changes to the company depending on operational needs. A business can also set goals, communicate priorities and create reports for potential investors, all by having a budget.