Budgets are an important business tool for businesses of any size. Budgeting provides a financial plan for your business based on anticipated income and expenses. It helps determine available capital, estimates spending, and predicts revenue for a given period of time.
Types of Budgets
According to Harvard Business School, there are five types of budgets a business can use. They are:
1. Zero-based budget – all expenses must be justified and approved at the beginning of each new budget cycle
2. Static budget or incremental-based budget – uses historical data to determine the upcoming period’s budget and does not change regardless of deviations in revenue and/or expenses
3. Performance-based budget – budget developed based on the relationship between funding and expected results
4. Activity-based budget – analyzes the company’s goals and activities to predict costs
5. Value proposition budget – looks at each expense or budget category to determine what value it brings to the business
Why Budgeting is Important
Developing and tracking a budget can feel like a daunting and tedious task, especially for a small business with limited staff resources. However, budgeting offers three important benefits:
1. Track cash flow and ensure resource availability. Creating and tracking a budget lets you see what areas of your business need more financial resources and where you may be able to scale back spending. It helps you plan for larger expenditures, ensuring you have the money available to cover those expenses.
2. Plan goals and report. Budgeting determines your spending and how much revenue is needed to meet your financial goals. Financial goals should be attainable enough that they determine your spending. By setting, tracking, and reporting financial goals you are able to plan for your company’s future and keep employees and stakeholders informed of the financial health of the company.
3. Determine business decisions and attract investors. As budgeting helps predict revenue and expenses, it is a useful tool in making business decisions, such as the ability to hire new staff, purchase new equipment, or invest in a new product. Additionally, when seeking funding from banks or investors, a well-planned and managed budget can give outside funders confidence in the future of your company.
With our Fractional CFO services, there’s no need to add headcount to your company. We will work closely with you to create and track your budget, so you can take care of business while we take care of the books. Contact us today for a consultation.