Business Budget: how to create it and types

One of the most important (and challenging) aspects of managing a business is defining realistic and measurable goals to guide the company’s operations towards long-term profitability. Poor financial planning is one of the most common mistakes entrepreneurs make, along with excessive optimism when estimating the scope of their projects.

To address these issues, entrepreneurs have a traditional and essential management and planning tool: the business budget. It allows them to establish growth projections, gain visibility into the company’s resources and liquidity, and quantify the goals of the business growth strategy.

What is a business budget?

The budget is a fundamental pillar of business accounting. It estimates and details the income, expenses, operations, and resources of a business over a specified period, considering strategic objectives expressed in measurable metrics. It transforms the future plan of a company into concrete and actionable figures, calculating the resources needed to achieve them and estimating the benefits it can obtain in return.

A well-prepared budget:

• Helps reduce uncertainty and risk.
• Is a well-founded estimate based on the company’s past results and macroeconomic indicators.
• Establishes spending and investment limits to ensure cost control.
• Is goal-oriented but considers the needs and limitations of the company.
• Is flexible, allowing adaptation to market changes and other unforeseen circumstances.

A well-structured, detailed, and calculated business budget will help organize business activities, identify and solve potential deviations, and maximize profit margins.

Types of business budget

Various types of business budgets can be distinguished based on the planned execution time and whether they affect the entire company or specific departments or operations.

Based on temporality

The temporal scope of a budget will be determined by the business goals guiding it. Thus, we can differentiate between:

• Medium and long-term budgets: Spanning more than a year, based on more ambitious goals requiring significant savings or investment efforts, such as pivoting or internationalization.
• Short-term budget: Objectives in this budget can (predictably) be achieved in less than a year and with less economic effort, such as implementing new software, hiring talent, or financing specific actions like marketing campaigns and events.

However, it is strategic for the company’s survival to conceive short-term budgets and goals as intermediate steps toward achieving longer-term objectives.

Based on scope

All companies should have a general or master budget, which can be broken down into others applicable to different business areas.

• The master budget provides a complete financial overview of the company, including all budgets for different activities and departments. It allows obtaining visibility into the needs, resources, and aspirations of each, balancing resource distribution and aligning each area’s strategy with company-level objectives.
• Depending on the size and operational complexity of the company, budgets can be developed for specific departments such as marketing, human resources, research and development, treasury, etc.

Objectives of the business budget

The main purpose of a budget is to ensure the economic viability of a project and, consequently, its survival. Therefore, a business budget serves to:

• Provide control over finances. Identifying risks and opportunities and having visibility into the company’s economic movements will optimize resources and drive growth.
• Manage financing. Once economic needs in the near and distant future are identified, the business can evaluate and access the capital demanded by its budget in the most suitable form for business circumstances (whether participative, flexible, non-dilutive —such as venture debt or business loans— or in the form of equity, such as venture capital).
• Avoid uncontrolled indebtedness. Properly budgeting resources and calculating future expenses will prevent companies from resorting to unforeseen financing. It will also be crucial to ensure they comply with their financial and legal obligations.

How to create a business budget

Once the type of business budget to be created and its objectives are determined, it is necessary to gather key data and organize it clearly and systematically.

What Should the Budget Reflect?

• An estimate of projected income during the specified period.
• A forecast of expenses the company may incur, whether fixed (rental of premises, basic supplies, salaries) or variable, such as energy prices. Contingencies should also be considered in the budget, avoiding financial risks.
• Profit and savings goals.
• Key indicators such as the break-even point (when income equals costs), ROI (return on investment), and other KPIs (key performance indicators) allowing profit calculation and results monitoring.

Where does the information come from?

Budget estimates, as mentioned earlier, must be well-founded, reasonably reliable, and as accurate as possible. To achieve this, they can rely on an in-depth financial analysis that ensures maximum visibility into the company’s financial state.

Companies with a certain lifespan should look at their history of results, reviewing previous budgets to detect possible errors and areas for improvement, as well as to better estimate the costs and profitability of their services or products. Additionally, both younger and older companies will benefit from considering external information such as market studies, data from other companies, and macroeconomic factors.

Important considerations

For both budget creation and compliance, certain factors such as leveraging the advantages of technology or cross-functional cooperation within the company will make a difference.

• Communication and transparency between departments are crucial. The CFO and their team should collaborate with other department heads and teams to review, adjust, and approve proposed budgets.
• Effectively managing the budget will be greatly assisted by using resources such as account control tools like ERP systems and financial software, payment and collection management solutions like confirming or invoice advance, and instruments for monitoring capital allocation and usage to teams, such as corporate cards with defined roles and spending limits.
• Finally, ongoing budget tracking and review over time will be essential. Adjusting to unexpected situations will allow the company to adapt to changes in the market or macroeconomic landscape, and updating the budget with actual sales and cost figures will help adjust it if initial estimates were off course.

Information, planning, and foresight are fundamental assets for maintaining a company’s financial health. Having a well-structured business budget will help entrepreneurs organize their resources effectively, identify priorities and risks, and meet payment obligations while managing cash flow and working capital to grow the business.