How to calculate your total budget for your business

Most companies establish budgets that they use to track revenue and plan their expenses. Learn best practices and how to calculate yours.

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Most companies establish budgets that they use to track revenue and plan their expenses. In addition, many individuals use budgeting practices in tracking their personal finances. Regardless of the situation, creating an overall budget and calculating total budget income and expenditures is crucial in order to ensure prudent handling of financial matters and to avoid overextending beyond available financial resources. Let's look more closely at what goes into coming up with and calculating a total budget.

Knowing What You Have

The first step in effective budgeting is establishing how much revenue you'll have available. For businesses, estimating sales can be challenging, especially for start-ups with an unproven track record of success. Conservative financial management will put you in the best position to avoid unexpected cash shortfalls, but it also prevents you from making more aggressive efforts to expand and grow your business. Nevertheless, by using past results and making best estimates, you'll be able to establish a starting number that you can refine over time as you become more experienced in producing total budgets.

Knowing What You Need

Once you know your revenue, the next step is prioritizing spending across the many different items that a business needs. Fixed costs such as rent and insurance are typically easy to budget for once you've signed a lease or gotten coverage, but variable costs such as labor, utilities, and the cost of raw materials for production require that you consider expected growth. Setting priorities will ensure that you cover all the costs involved with your most important areas for success before spending money on less essential parts of your business.

What to Do With Unbalanced Budgets

Ideally, your revenue will match or exceed your expected costs. In that case, you can take any excess money available and either increase spending now or save the money for use in future periods. Establishing a budget surplus during strong periods in your business can be valuable to help you weather downturns that can occur in the future.

If your revenue is less than your spending, then you can either cut your expenses or find other ways of obtaining the cash to make up the shortfall. Boosting revenue is the best option, but borrowing money or finding investors to make capital contributions in exchange for an equity interest in the business are also available.

Creating and calculating a total budget is useful to give a snapshot of what you expect from your business over a given period of time. By considering your budget closely, you'll have a tighter rein on your finances and maximize your chances of success.

Topics:
  • Budgeting
  • Starting a Business
  • Budgeting
  • Starting a Business
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  • Starting a Business
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This article was written by The Motley Fool Staff from The Motley Fool and was licensed as an article reprint from May 23, 2016. Article copyright 2016 by The Motley Fool.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917.
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