A Financial budget for a Business is a projected financial statement for a specific
time. It serves as the roadmap for monitoring a business’s activities and performance.
This financial tool is one of the most important for the importing business owner.
As for financial planning, many small business owners do nothing more than make sure
that their payroll is taking care of for this week. This is very short sighted and
often leads to failure.
By the use of a business financial budget, you can plan where your business is going
both in the short term and long term periods. Financial budgets are updated with
actual figures as time goes by. You can see if you are on course or not. It will
allow you to adjust accordingly if your business takes another direction. Without
this, you are simply operating your import from China business with your eyes closed.
Typically Business Financial Budgets are done for a short term period and a long
Short term Business Financial Budget - Financial statement for the current year broken
out by months or minimally by quarterly.
Long term Business Financial Budget - Annual financial statements for a minimum of
3 years sometimes up to 5 years.
Types of Business Financial Budgets
There are three primary types of Business Financial Budgets:
Operating Budget or Income Statement - It estimates incomes and expenses of a business
for a future time period. This determines whether the business will be profitable
for the specific time period.
Cash Flow Budget - This projects out the flow of cash in and out of a business for
a specific time period. Cash is king for the small business owner. Without cash
on hand, the small business owner will not be able meet the financial obligations.
Capital Budget - This budget allows you to plan for the acquisition of long term
assets to benefit your company. Capital assets which include land, building, equipment
are expensive items. Having a capital budget will allow you to plan your purchases
Steps to Creating Business Financial Budget
You can simplify the budgeting process by the use of an accounting software such
as QuickBooks or Peachtree Accounting. For examples of operating, cash and capital
budgets in an excel file format that you can modify and use for your own business,
Here are the steps to creating your own budgets:
Identify the type of budget and the major categories which will be included:
Budget Categories - All income and all expenses
Cash Budget - All cash in and all
cash out of the business.
Capital Budget - Long term costs and contributions of
Organize the budget categories in order so that calculations can be completed.
Budget Order: Profit or Loss = Income - Expenses
Capital Budget Calculation: A number of different
methods are used such as payback method, net present value method or internal rate
Collect all your information that will impact the budget.
Make estimates of the budgeted amounts for future periods. This can be adjusted
by an absolute amount if known or just increase/decrease it by a percentage.
Complete financial calculations.
Sensitivity Analysis Using Business Financial Budget
Once you have created your business financial budget, you can conduct some sensitivity
analysis. This is creating “what if” scenarios to see the impact of changes in
certain variables on your business. You think of a scenario for your business, plug
in the new number in the spreadsheet and what what happens. Here are some common
Increase sales by 5%, 10% or 15% to see changes to your bottom line.
Decrease your cost of goods by 5% due to a new supplier. See the impact on your
How much more net income can you generate by decreasing operating expenses by 5%.
You can come up with other scenarios which are applicable to you. Have fun!