A budget is a forecast of all of your business’s income and expenditure, including all income streams and payable accounts for a specific period, often done monthly, quarterly or annually. Creating an annual budget is generally the most effective way to plan for the coming financial year, however, annual budgets can then be divided into monthly budgets and reviewed on a quarterly basis, to keep track of income and expenditure.
At the end of the allotted period, the budget forecast is compared to the actual accounts records. A well planned annual budget should be roughly in accordance with the business’s actual performance, as recorded in their financial statement, and will help you to plan profits, spending and overall cashflow for the following year.
Creating a budget for your business will not only help you to plan for the future, it will also help you to monitor your business’s performance, to quickly identify areas where you may be overspending, and to see where your business is losing money. Once your budget has been created, reviewing it regularly by going through an estimated vs. actual profit and loss statement can help you to spot these problem areas and to avoid possible financial pitfalls in the future.
If you are setting up a new business, it is a good idea to include a budget as part of your business plan, particularly if you are applying for a loan from a financial institution or approaching possible investors. A well planned and realistic budget will help investors to see how your business is likely to perform, and how long it will take for them to see a return on their investment.