Making a budget

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With a start-up budget, profit budget and cash flow budget, you can estimate the company's financial future.

Making a budget enables you to plan your business better. You get a picture of what creates profitability and can keep a check on finances, ensuring bills can be paid.

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Start-up budget

At the start-up phase, you may need to make investments to ensure your business can actually get off the ground.

A start-up budget shows the costs you will incur in the very short term and your ability to finance them. It also includes the invoices you will have to pay at the start-up phase.

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Profit budget

A profit budget is a summary of the company's expected income and expenditure and the projected profit for a particular period, a month for example. The most difficult thing to estimate is how much you will sell, in other words what your income will be.

An established company can base this on past sales and make some adjustments to budget revenues. It’s not as easy for a new company. To budget sales in a new business, you usually have to look at more things, like:

  • what the products should cost
  • what sort of products the company will have and how many of the different goods and services you think you can sell
  • what customers the company will have
  • what geographical markets the company will address
  • what marketing efforts the company plans to implement during the year.

Several of the cost items in the income budget are directly affected by the size of the sales, such as cost of goods and personnel costs. You should therefore start budgeting your earnings before looking at the costs.

When you have made your profit budget you know how much you need to sell to cover your costs.

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Control with a budget

A budget is not a mirror of reality, but an economic plan with hopes and expectations. It is best not to get bogged down in finer details, but to look at the basic outlines. A good budget shows the business's problems and opportunities. A realistic budget helps to achieve business goals.

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Cash flow budget

To avoid unpleasant surprises in the form of sudden bills to be paid, the company must have liquidity. This means the company must have access to cash every month. A cash flow budget shows the difference between the money coming in and the money going out month by month.

A profit budget shows whether the business is making a profit or a loss, while a cash flow budget shows whether there will be enough money to cover the month's expenditure.

To avoid bankruptcy, you need to make a cash flow budget month for month. It is no comfort knowing you will have enough money in a year from now, if you are out of money already in four months. That is why you need short periods in your cash flow budget. 

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