How To Create a Business Budget with 7 Steps

Once your business is up and running, it’s essential to manage your financial performance. Establishing a business budget is the most effective way to keep your business and your money on track.

Having a business budget lets you know how much money you have, how much you’ve spent, and how much you’ll need in the future. It also can drive important business decisions.

In this article, we’ll discuss what a business budget is, why it’s important to every business, and how to create a good budget for your company. 

What is a business budget?

A business budget is a detailed spending plan that outlines how you’ll spend your money monthly or annually based on your business income and expenses.

Every penny counts! So, if you want to make the most out of your business funds, a business budget is the perfect tool, as it allows you to compare your plan with reality to see how you did. 

A business budget will help you:

  • Determine your available capital
  • Forecast your spending
  • Predict revenue

Why is a business budget important?

Why is a business budget a must-have tool for every business? Simply put, a budget assists you in determining how much money you have, how much you need to spend, and how much you need to bring in to fulfill your business objectives.

More specifically, a business budget can help your business benefit by:

  • Identifying money that is available for reinvestment
  • Predicting slow months and keeping you out of debt
  • Estimating what it will take to become profitable
  • Providing a window into the future
  • Helping you keep control of the business

How should you create a business budget?

Now that we all acknowledge the importance of a business budget, it’s time to learn how to create a good one.

A budgeting process begins with a review of your previous revenue and spending as you get started. The longer you’ve been in business, the easier this process will be because you’ll have more data to work with when creating your forward-looking budget. However, suppose your company is fresh new; chances are you may need to conduct more in-depth research on average expenditures in your sector or area to develop workable estimates for your projected finances.

Every good budget should include seven components:

1. Estimated revenue

The first step in creating a business budget is to go backward and identify all of your revenue sources. To find out how much money comes into your company on a monthly basis, add all of those income streams together. When calculating your income, make sure you look at revenue rather than profit. 

Once you’ve identified all of your income streams, calculate your monthly income. It’s critical to do this over a period of months — preferably at least the previous 12 months if you have enough data.

2. Fixed costs

The second step is to identify all of your fixed costs. Fixed costs are expenses that remain constant throughout a particular period. They’re the expenses you have to pay whether or not your company operates. For example, due to the outbreak of Covid-19, many companies are being forced to shut down their operations temporarily. Though there are no operating activities, businesses still have to pay for fixed costs such as rent and interest charges.

Fixed costs within your business might include:

  • Rent
  • Supplies
  • Debt repayment
  • Payroll
  • Depreciation of assets
  • Taxes
  • Insurance

Every business is unique, so your fixed costs will differ from those listed above. Take a few minutes to make a list of any other fixed costs that your company may have.

3. Variable costs

While looking for the information you need to identify your fixed costs, you’ll notice that your company has some variable expenses as well. Variable costs fluctuate based on how often you use a service. Many of these, such as utilities, are required for your business to operate.

Some examples of variable expenses are:

  • Raw materials
  • Inventory
  • Direct labor costs
  • Equipment replacement 
  • Office supplies
  • Utilities

4. Periodic costs

As its name suggests, this type of cost doesn’t occur monthly or annually like fixed or variable expenses. However, there are some occasions that you’ll need these expenses, so you have to be aware of this and make a budget for them. Periodic costs include education expenses, networking expenses, travel expenses, etc

5. Cash flow

Cash flow is a metric that tells you the amount of cash that comes in or goes out of your business within a specific period. This metric also represents the amount of money produced or lost by a business during a given period.

Because cash flow is the oxygen of every business, make sure you keep track of it frequently. If you have a positive net cash flow, you’re likely on the right track. On the other hand, a negative net cash flow means you may need to reevaluate your strategies. 

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6. Profit

Profit is a business’s total revenue minus total costs, expenses, and taxes. If profits are increasing, your business is expanding. Based on your predicted income, costs, and cost of goods sold, you can estimate how much profit you’ll make.

If your profit margins (the gap between income and costs) aren’t where you’d like them to be, you should reconsider your cost of goods sold and consider boosting prices. Alternatively, if you believe you can’t squeeze any more profit margin from your company, consider increasing the Advertising and Promotions item in your budget to grow overall sales.

7. A budget calculator

When it comes to business budget planning, a budget calculator can help you know exactly where you are by compiling all of your budget’s figures into a single, easy-to-understand summary. 

Create a summary page in your spreadsheet with a row for each of the budget categories listed above. This is the foundation of your budget. Then write the total amount you’ve budgeted next to each category. Finally, add a new column on the right and record the actual amounts spent in each category at the end of the period. This gives you a quick snapshot of your budget without having to dig through layers of cluttered spreadsheets.

The bottom line

A budget is a road map for your business. Though it can be daunting and time-consuming, like any good habit or practice, you will see the positive results in just a month or so. Stay diligent and continue to reach out for guidance and informative articles to help you build a financially strong and healthy business with the Shoeboxed Blog

Shoeboxed is a cloud-based software that helps businesses turn their piles of paper receipts into digital data. With Shoeboxed, you can do tasks such as scan, store, and organize receipts, manage business expenses, and even track mileage for business travelers. It’s simple to install and easy to use. Try Shoeboxed today!

What You Should Know about Operating Activities

Operating activities are the tasks and duties a business has to perform on an ongoing basis to earn an income. They are the core activities of a business and as a result, they affect the cash flow coming in and out, and determine the business’ net income. 

In today’s article, we’ll discuss the types of operating activities, what to include in operating activities, and how operating activities and the cash flow statement are related. 

What are the types of operating activities?

Operating activities are directly associated with a business’s various functions, such as manufacturing, selling, marketing, etc. Here are the types of operating activities:

Revenue-generating activities: Generating revenue is one of  the chief goals of a business; therefore, the majority of business activities are activities that produce income. There are two primary activities that bring revenue to the business: selling products and providing services.

Marketing and advertising activities: These types of activities refer to your business’ actions regarding the promotion and advertising of goods and services. For example, you could hire a graphic designer to create promotional labels or packages. Or, if you want to push the promotions of your products, you’d need to hire a digital marketer to run a new ad campaign. 

Administration activities: Administrative activities are tasks related to maintaining a business. These duties vary widely from workplace to workplace but most often include tasks such as purchasing materials, human resources, and basic accounting. 

Maintenance activities: Maintenance activities are carried out regularly in order to keep your office neat, tidy, and functional. These activities include cleaning, visual inspection, functional tests, lubrication, measurement of operating quantities, and oil tests. 

Customer service activities: Customer service is important to any business as it solidifies the relationship between you and your customers, which results in greater loyalty and more sales. Customer service activities include the support you provide via email, web, text message, and social media. 

What to include in operating activities?

Operating activities are directly associated with a business’ principal goal: to sell its products or services. Through operating activities, businesses are able to generate income and make a profit. Therefore, these activities relate to transactions that affect net income.

The operating activities that result in cash inflows are:

  • Cash receipts from sales
  • Sales of shares
  • Income earned from investment
  • Settlements of lawsuits and insurance claims
  • Collection of accounts receivable
  • Supplier refunds

The operating activities that result in cash outflows are:

  • Employee payments
  • Supplier payments
  • Tax payments
  • Refunds to customers
  • Settlements of fines and lawsuits
  • Interest to creditors
  • Equipment purchase
  • Interest payment on loans and dividends

Operating activities and the cash flow statement

The cash flows from operating activities are one of the most important elements of the cash flow statement. Cash from operating activities is the money generated from the business’ core operations. It is distinct from the cash flows derived from investing and financing activities. 

In contrast to cash from operating activities, cash from investing activities comes from sales and purchase of equipment and assets (tangible or intangible) and other capital expenditures. Cash from financing activities is the money your business gains from the procurement and repayment of short and long-term debt, issuance of equity, purchase/sale of treasury stock, payment of dividends, etc.

The cash flow can be either positive or negative. Having a positive cash flow is a good sign meaning that your business is thriving. On the other hand, having a negative cash flow might indicate that your business is facing trouble. To get an accurate picture of a company’s cash flow from operating activities, accountants add depreciation charges, losses, decreases in current assets, and increases in current liabilities to net income. 

Business managers, owners, and investors review a company’s cash flow from operating activities separately from the other two components of cash flow to see the true source of a company’s money. A positive cash flow from operating activities for a continuous period means the company is going in the right direction and thriving. This is more important than a positive cash flow from investing or financing activities, which are one-time gains from selling assets or stocks. 

Read also: What You Need to Know about Operating Cash Flow Ratio

The bottom line

Operating activities are the business’ core activities to generate income. Operating activities result in operating activities cash flow, the most important element of the cash flow statement.

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on Shoeboxed. Shoeboxed is a cloud-based software that helps businesses turn their piles of paper receipts into digital data. With Shoeboxed, you can do many things such as scan, store and organize receipts; manage business expenses; store business cards and even track mileage for business travelers. It’s simple to install and easy to use.

What You Need to Know about Operating Cash Flow Ratio

If you’re running a business, make sure you’re analyzing your business health regularly. This lets you know how your business is doing and whether or not to adjust any strategies. Liquidity is one of the four areas of financial health along with solvency, profitability, and operating efficiency. Liquidity refers to how easily your business’ assets can be converted into cash.

But do you know how to calculate the liquidity of your business? It’s not complicated at all because all you need is the right tool. Today, we’ll introduce you to the operating cash flow ratio, a metric to gauge your company’s liquidity.

What is the operating cash flow ratio?

Operating cash flow ratio measures how well a business can pay off its current liabilities with the cash flow generated from its core business operations. As earnings can be manipulated by managing assets, this ratio is considered a more accurate measure of a company’s liquidity in the short term.

Because operating cash flow is related to the ability to pay off liabilities (debts and financial obligations of a business), the higher ratio, the better. A high number indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities. On the other hand, a low number points out that there isn’t enough cash to cover its current liabilities. Therefore investors and analysts will have to call for more capital. 

Operating cash flow ratio equation

Understanding operating cash flow ratio components

Before we learn about the operating cash flow ratio formula, let’s have a quick tour of its components. 

Current liabilities

Current liabilities or short-term liabilities are debts that must be paid within a year and can be found on the balance sheet. These include:

  • Supplier payments
  • Short-term debt payments such as loans to the bank or credit union
  • Dividend payments to investors
  • Taxes charges

It’s an obligation of every business to pay off its current liabilities. To do so, set current liabilities against current assets. It’s a good sign if they balance each other. It’s even greater if your business’s current assets are more than enough to cover your current liabilities. On the other hand, if your business doesn’t have enough assets to make up for short-term liabilities, you could face financial trouble.

Operating cash flow

Operating cash flow reports inflows and outflows as a result of regular operating activities. It includes the money your company gains from ongoing activities, such as manufacturing and selling goods or providing a service to customers. However, it doesn’t cover any other funds within the business, such as capital expenditures or investments. 

Operating cash flow is calculated by deducting the business operating expenses from the total sales revenue. It shows business owners and operators the big picture concerning their business’ money flow, where funds are coming from, and going to. 

By looking at the cash flow from operating activities, you can determine the financial success of your business’s core activities. As a result, it greatly impacts the company’s liquidity. It allows you to plan out how to generate and maintain sufficient cash necessary for operational efficiency and other necessary needs.

The equation

Now that we know about two components associated with the operating cash flow ratio, it’s time to learn the equation.

Operating Cash Flow Ratio = Operating cash flow / Current Liabilities

As you can see, there’s nothing complex here, simply divide cash flow from operations by current liabilities, and you’ll have an answer. 

However, the preciseness of the equation lies in the accuracy of the numbers input. To make sure there’s no error in the amount of operating cash flow and current liabilities, your bookkeeper or accountant needs to keep and record all the payment receipts and sales proposals accordingly.

Isn’t it frustrating to go through that process manually when you’re living in the technological era? To be honest, there’s no benefit of doing things that way anymore because it takes up a lot of time. As a result, you’ll have to pay the price of working extra hours to cover other tasks that you don’t have enough time to finish. 

You can see it coming, aren’t you? No worries, you still have a chance to turn the table around by reaching for the help of a digital tool. A digital tool allows you to scan your paper into data, get them organized, and make a report easily. Shoeboxed can help you do all these things within an hour instead of days. Check out Shoeboxed now and find out how much time you could save! 

Example of the operating cash flow ratio

Imagine that Company A has a net cash flow from operations of $500,000 and a current liabilities of $120,000. Apply the formula and you’ll have:

500,000 / 120,000 = 4.17

This means that Company A earns $4.17 from operating activities per every $1 of current liabilities. Alternatively, it can be viewed as, “Company A can cover its current liabilities 4.17x over.”

The bottom line

Operating cash flow ratio provides you with a snapshot of your regular operating activities. By looking at this number, you can determine how sufficient your business is doing. Additionally, accessing the operating cash flow ratio to know your ability to pay off liabilities in a given period will keep your business out of trouble from financial litigation.