Budgeting Basics

Many people think of the word “budget” as a bad thing. They think sticking to a budget restricts their lifestyle and doesn’t give them the flexibility they want. In fact, the reverse is true if you are honest about your income, expenses and intend to live within your means and grow wealth. The exact same principles apply to businesses, particularly small and newer businesses with high financial risk.

Each month an individual working a family budget should lay out what their expected income and recurring expenses are. Many of the expenses are the same each month, such as rent and insurance, but some vary month to month as they project for birthdays, holidays, and other family events that require money. The difference between the income and the expenses is discretionary money. The individual or family gets to choose what to do with this money each month, and that gives them the flexibility to reach for particular goals at their own pace.

The same holds true for businesses. A good business will help your business estimate both constant and infrequent expenses, as well as fluctuations in revenue throughout the year. This helps the business owner spend less money than they are taking in (showing a profit), while generating an income for themselves and planning future investments. A good accountant will also establish a flexible budget rather than a static one. A flexible budget allows for changes month to month based on productivity or demand factors. If you have a lawn care business for example, you should budget much more money for gas, repairs and equipment from April through September than you do from October through March.

Crucial to the budgeting process is the review of the budget each month. Your business should reconcile actual expenses for the previous month and if necessary, revise estimations going forward. A good business does not merely record numbers that you provide on a spreadsheet, but puts thinking into the fluctuations, recognizes trends and advises you on necessary adjustments to your plans.