Question: Why Do I Need to Prepare a Business Budget? What is the Purpose of a Budget?

Answer:

Preparing a Budget

In the midst of starting and running your business, you may wonder why you need to stop and put together a budget. Just as for personal budgets, a business budget is a vital tool to success in starting and operating a business. A properly prepared and updated business budget serves several purposes:

Plan Start-up Needs for Your Business Plan
The first purpose of a budget is to help you gather information for your business plan, including all the items and expenses necessary for start-up. You need to know what it will cost you to open your doors the first day of your business. This includes inventory, furniture and fixtures, computers and software, and, of course, the costs of finding and securing a location for your business.

Work with a Lender
You will probably need to borrow money from a lender or from family and friends for start-up. A budget shows your lender how much you need for start-up and what your cash flow situation will look like in the first three years of your business. A reasonable budget can increase your credibility with your lender.

Plan Your Spending
Your budget can give you information about how much you can spend each month and how much you can take out of your business as a salary or draw to live on. As you start out, you may not be able to take much, but you can see what the future looks like and you can plan for your living expenses as you get started.

Know Your Required Profit
If you set up your budget on a "required profit" basis, you can see how much money you need to make to meet all your expenses, including personal expenses. A required profit budget starts with all the expenses you need to pay each month, leaving the required profit as the income number needed to make the budget balance.

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