Budget Basics

Why Budget?

Budgeting offers many advantages to your business. It requires that you look at past historical performances by comparing your "actual" revenue and expenses to your "targeted" revenue and expenses. (If you're just starting your business, you can use industry association standards for these figures. More on this later.) You can then evaluate your accomplishments. By reviewing these figures you create an early warning system for potential problems.

Budgeting also requires you to look ahead and formalize future goals. By establishing a budget, you can set goals for achieving a certain level of income and monitor your expenses. Many small-business owners have remarked that their increase in profit margins did not occur until they had a written revenue goal and a method with which to monitor expenses. Other business owners need to know their sales levels in terms of dollars and how hard they need to work to make the budget work. You'll know you are on top of your business when you can tell your accountant that you need to sell 3.25 items per day in order to make your budget work and meet your financial goals.

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This article was originally published in the September 1997 print edition of Entrepreneur with the headline: Budget Basics.

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