Steps to Create a Budget for Your Business

Creating a Budget

One of the main reasons many of our clients contact us initially is to gain a better understanding of their financials and what they are telling them.  One of the best ways to do that is to start with the budgeting process as it provides you with an understanding of your revenue, your cost of goods, (it also helps you understand what drives costs in your organization) and your operating expenses.  If you are a start-up business, the process is a little tougher as you do not have existing financials and an existing run rate to rely on.

Benefits of Budgeting for your Business

Budgeting allows you to:

  1. Get a better handle on your cash flow

  2. Determine how your business is performing financially and to gain insight into your financials to help you make sounder decisions

  3. Helps you plan for the future of your business

  4. Helps you manage your goals and objectives for your business

  5. Helps you understand what drives costs in your organization

Before Your Start Budgeting

Before you start the budgeting process for your business, it is a good idea that you have your Chart of Accounts set up properly that reflects your operations.  If you are working off a default chart of accounts for your business that you were not involved in with your bookkeeper or accountant, now is a good time to sit down with someone and modify this before you get started.  To set up a chart of accounts properly for a business, you need to understand the business.

Revenues Every business will differ on how your revenue is broken out. If you have multiple products or service types or other forms of revenue that you want to have an understanding of how each is performing, you will want to break those out separately.  It could be as easy as Products, Services, Subcontracting, and Interest Income.  If you want to have sub-categories, that is perfectly fine as well.  

Cost of Sales Depending on your business your cost of sales (COS) will differ, so you may want to break out your cost of sales so that you can track it as it directly relates to the revenue that it is associated.  ​ The cost of goods sold (COGS) are part of the cost of sales and are those direct costs that are tied to the production of goods sold by the company such as the cost of materials and any direct labor costs to produce the goods. The cost of goods are included in the overall cost of sales. If you are a manufacturing business or a retail business that buys products and inventories them, you have cost of goods sold (COGS).  If you are a services business, you will not have the cost of goods sold, but you may have a cost of sales (COS). The cost of sales items could include commissions, shipping and delivery, and any other expenses that are related to selling.

Be sure to discuss this with your accountant, so you understand what is relevant for your business.