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How to write a business budget

businessmeeting30396676.jpgBusiness budgeting is one of the most powerful financial tools that is available to any small-business owner. Writing a business budget means establishing a planned level of expenditures, at a fairly detailed level. It is important to know that a company may plan, and maintain a budget, on either an accrual or a cash basis. The bottom line is that maintaining a good short- and long-range financial plan enables you to control your cash flow.

If you are writing a business budget, for a start-up you will need to make some assumptions in order to get started. This can be done by asking the following questions-

  • How much can be sold in year one?

  • How much will sales grow in the following years?

  • How will the products and/or services you're selling be priced?

  • How much will it cost to produce your product? How much inventory will you need?

  • What will your operating expenses be?

  • How many employees will you need? How much will you pay them? How much will you pay yourself? What benefits will you offer? What will your payroll and unemployment taxes be?

  • What will the income tax rate be?

  • How much will it cost you in rent or debt service for your facilities?

  • What equipment will be needed to start the business? How much will it cost and will there be additional equipment needs in subsequent years?

  • What payment terms will you offer customers if you sell on credit? What payment terms will your suppliers give you?

  • How much will you need to borrow? What will the collateral be? What will the interest rate be?

When it comes to writing the budget, you can create it manually or with the budgeting function that comes with most bookkeeping software packages. You can also purchase separate budgeting software such as Microsoft Money or Quicken, to help you facilitate the process.

The first thing to do is to set up a plan, for the following year on a month-to-month basis. Starting with the first month, you will need to establish specific budgeted dollar levels for each category of the budget. Keep in mind that the sales numbers will be critical since they'll be used to compute gross profit margin, and will help determine operating expenses, accounts receivable and the inventory levels that are necessary to support the business. In determining how much of your product or service you can sell, you will need to study the market in which you operate, your competition, potential demand that you might already have seen and economic conditions. For cost of goods sold, you'll need to calculate the actual costs that are associated with producing each item on a percentage basis.

In order to calculate operating expenses, you will need to consider items such as:advertising, auto, depreciation, insurance etc. Then you will need to factor in a tax rate that is based on actual business tax rates. You can usually obtain these from your accountant. You should also consider each specific item in fixed assets- broken down for real estate, equipment, investments etc. Keep in mind that if your new business requires a franchise fee or copyrights or patents, this will be reflected as an intangible asset. On the balance sheet, you will want to break down inventory by category. Remember that for inventory, accounts receivable and accounts payable, you'll figure the total amounts based on a projected number of days on hand. On the liability side, you should break down each bank loan separately.

Finally, it is important to remember that whether you budget manually or use software, it's always advisable to seek input from your accountant in preparing your initial budget.

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