Operating a business requires proper attention to its finances. Controlling expenses and balancing them against income is accomplished through the budgeting process. Businesses primarily use the cash budget or the operating budget format. Preparing a budget is necessary if a company's expansion is reliant upon financing. Banks and other lending institutions determine a business’ bottom line through investigation of its cash or operating budget. A well-prepared, accurate budget assessment of the business’ success provides the basis for future expansion plans.
A cash budget’s primary focus is forecasting expenses and estimating incoming cash revenues. Simple in structure, a cash budget’s preparation begins with an entry for cash-on-hand, including columns for sales for cash, credit collections and any other cash intake method employed by the business. Expenses included in the cash budget include such entries as invoices from the suppliers that stock the business, payments on loans, salaries and, if investors are involved, dividends paid to them. Prepare a cash budget quarterly to estimate the bottom line, or the cash balance after subtracting expenses from revenues.
Prepare an operating budget for a one-year financial cycle. Similar in nature, albeit more in-depth than a cash budget, the operating budget consists of sub-budgets that generally address sales and production, utility costs and loan payments, as well as salaries and tax liability. Capital outlays are not included in an operating budget because the one-year operating budget is considered a short-term budget, while capital outlays are long-term budget items.
When preparing a cash or operating budget, structure it in such a way as to have a minimum amount of ready cash available at all times. Be realistic when preparing a budget. Misstating projected income and expenses can have a negative effect on the prospects of success. Budgeting is an ongoing process wherein consistency is an essential element. Budgets require constant attention to create and sustain an accurate snapshot of business finances. Prepare a separate budget to address long-term outlays such as high-dollar equipment purchases, a mortgage on a building or other similar long-term investments for the business’ future.
A resource partner of the U. S. Small Business Administration, the Service Corps of Retired Executives, or SCORE, provides assistance to business owners through online workshops and webinars, as well as with in-person mentorship by SCORE volunteers. With is 364 chapters and 13,000 volunteers, SCORE counts more than 9 million people counseled through its programs, which began in 1964. SCORE volunteers are retired or working business owners and executives, as well as corporate leaders who lend their expertise to small business owners and entrepreneurs.