There's no way to look into a crystal ball and see exactly how much your business will earn and spend during the upcoming year, but you can use a budget as a tool to lay out a realistic scenario. A budget is a financial projection based on current information that compares expected revenue and expenses. Although actual circumstances will almost certainly differ from your budget, this document can serve as a road map, helping you to chart a path and anticipate shortfalls and opportunities.
Earning a Budget Surplus
If your business is functioning as it should, it earns more than it spends, generating a profit or budget surplus. A business that earns a surplus has sustainable operating costs relative to its gross revenue or receipts. In addition to generating sufficient income in sales, a business with a budget surplus also has healthy cash flow – it receives payment for goods and services quickly enough to cover the expenses it incurs. A business may also have a budget surplus by using financing strategies such as loans and credit cards for working capital. However, if you rely on financing to make ends meet, it is just a matter of time before you run into a budget deficit because you'll need to start paying back the money you borrow.
Incurring a Budget Deficit
If your business spends more than it earns, you eventually confront a budget deficit or revenue shortfall. Your operating costs may exceed your earnings if your business model is faulty or if you're not charging enough for your products and services to cover your costs. Alternately, you may run into a cash flow shortfall because of short-term difficulties or bad breaks, such as inclement weather, broken equipment or a surge in competition. Review your budget proactively even if your business suffers from circumstances that seem temporary. A short-term problem can become a long-term nightmare, and it may be difficult to determine with certainty whether any situation will be long- or short-lived. Your business may also encounter a budget deficit if you invest heavily in the future by buying equipment or ramping up production.
Using Your Business Budget
Your business budget can tell you if you're likely to encounter cash flow difficulties or if your revenue during upcoming months won't be sufficient to cover the costs you'll likely incur. The information in your budget can help you to react to this anticipated shortfall by seeking financing before you run out of money or adjusting your plans, so you don't spend as aggressively on expansion. If your budget shows a significant surplus, use the opportunity to save for the future or invest in infrastructure that benefits your business in the long term.