Budget Plans: Definition, Benefits, and How to Make One

In business, a budget plan is crucial so that the business can continue to run with the financial estimates that have been made.

Not only that, making a budget plan or budgeting in business is also part of seeing the estimated expenses and income of the business in more detail.

The budget plan will also be a guideline or guide for making decisions in business/companies.

If a business has a good budget plan and financial reports, it can be said that the business can run smoothly in the long term.

Definition of Budget Plan

Quoted from Investopedia, a budget plan or budget plan in business is an estimate of expenses and income in a certain time period which is usually evaluated regularly.

Not only companies or businesses, budget plans can also be done by individuals or households who really want to do financial planning in more detail.

By knowing and tracking the use of money in more detail through a budget plan, you don't need to worry if there are unexpected events or large expenses.

Budgeting in business also helps the company's leadership level to know how far the business is growing and how the strategies that have been implemented are performing.

Corporate budgeting is very important to ensure that operations run efficiently.

In business, a budget can help you determine expenses, estimate income and emergencies, and set the direction of business goals.

Benefits of a Budget Plan

Not only does it help make decisions in business, according to Indeed, here are some benefits if you do a budget plan in business:

1. Manage Cash Flow

A budget plan in business must be done because it is important to manage cash flow more efficiently.

Income and expenses are crucial components that can affect the overall financial condition so they must be controlled properly.

2. Allocating Resources

In making a budget plan, a business definitely needs accurate data regarding company performance.

This data is then important to consider in managing the need for resources and operational funds for the company to be more effective.

3. Measuring Business Performance

If you make a budget plan for your business, it will be easier for you to compare the operational processes and performance of previous and current companies.

For example, through financial analysis, you can find out income from year to year which can be used as evaluation material and form a better strategy for the business.

4. Improve Decision Making

Effective financial planning or budget planning is an important component for decision making in business.

When your budget plan is effective, the decisions made will be more profitable and better for the overall financial condition of the business.

5. Identify Risks

A budget plan allows you to compare the company's financial performance, including managing cash flow and viewing income and expenses.

With detailed information related to this, your business will find it easier to identify potential challenges or problems that will arise.

Faster identification of problems can also help management to think of solutions and act faster.

How to Make a Budget Plan

Although there is no specific standard, at least a budget plan must have 3 main components, namely:

• non-fixed expenses;
• fixed expenses; and
• income.

The longer your business runs, the more data there will be that can be used to consider setting a budget.

Here's how to create a budget plan for your business:

1. Review the Company's Income and Financial Condition

The first step before making a budget plan is to review and review the financial condition of your business.

In addition, make sure to also look at the sources of business income and how they perform.

You must do this to then add up the sources of income and how much money the business generates in one month.

This data should be presented per month and have at least 12 months or one full year of data to prepare the next budget plan.

After knowing the monthly income pattern, you can start projecting how much income you can get. Remember to calculate revenue or income, not profit.

2. Determine Fixed Expenses

The next step is to make a list of fixed expenses that affect expenses in the next period.

Keep in mind that fixed expenses will be the same amount, no matter how much income comes in.

These fixed expenses can be weekly, monthly, or annual expenses. Examples include rent, loan payments, employee salaries, and taxes.

After finding the number, you can subtract the total income from this fixed expense.

3. Determine Other Expense Variables

After finding the amount of fixed expenses, the next is variable expenses.

These expenses can change, adjusting to the production or income of your business.

Some examples of variable expenses include part-time employee salaries, business owner salaries, production materials, and the cost of using certain tools that depend on business activities.

After finding the number, you can also subtract it from the amount that has been subtracted from the previous fixed expenses.

4. Determine Emergency/Unexpected Costs

Although you may experience a surplus of income, you should not forget unexpected expenses.

In making a budget plan, both for personal and business, unexpected funds are crucial and must still be left over from your budget.

5. Determine Estimated Profit

After the steps above are carried out, you can subtract the total income from the total expenses. The number obtained will be net income.

It is normal if in the early years the numbers that appear are still negative, which means that your business has not made a profit, especially small businesses/SMEs.

6. Finalize the Budget Plan

Now, after getting the final numbers, you can determine the purpose of each expense that will be made.

After that, create a strategy to use the budget effectively and don't forget to review and evaluate it periodically.

That's the information about the budget plan and its role in business.

It is undeniable that determining a budget for a business is crucial.

As a professional or businessman, you must understand how to analyze finances and create a budget plan for your business.

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