A budget model is an outlined financial plan for businesses. This may include how to deal with a surplus of money as well as how to handle debt. If you are looking for budget models, chances are you are just starting out, or are in the planning phases of your business and need to determine which is the right model for your needs.
There are several basic budget models from which to choose. For instance, zero-based budgets account for every penny you spend each month while flexible budgets allow different cost variables.
In this article we will address multiple proven budget models as well as why choosing the right budget model is vital to the long-term success of your business. We will also cover tips for sticking to and tracking the selected budget.
Why Is a Budget Model Important to My Business?
Selecting the right budget model for your business is the difference between sinking and swimming. Anyone can start a business. Especially after coming up with the capital to do so, either through loans, crowdsourcing, or investors. However, not everyone is good at managing finances, which is basically what a budget is all about: Designating where your money needs to go each month and precisely for what expenses or investments.
The right budget model for your business makes this process super easy. Not having a budget equals poor finances for your business in the long-run. On the flip side, employing a budget model leads to superior financial opportunities for your business. Some of the most import positive aspects of applying a budget model to your business include:
- Creating a proper spending plan;
- Covering all of your expenses each month;
- Keeping you out of debt and helps pay down current debt;
- Building adequate savings for emergencies;
- Allowing for investments and better financial opportunities;
- Allowing you to measure your finances more accurately, and
- Putting everyone on the same page.
Choosing the Right Budget Model
Selecting the right budget model for your specific business doesn’t have to be scary. It also doesn’t have to be permanent. Anyone who has ever had much to do with running a business knows that nothing is set in stone. The economy can take sudden turns, as can just about every other aspect of the business from the cost of utility bills to the price of inventory and supplies. The bottom line is that you can always adjust your budget model, or even choose a different model altogether.
So, have no fear. Nothing is forever, and it’s not a prison sentence. Choosing the right budget model can even be a fun thing. Personally, I find great pleasure in creating a budget for new ventures and tracking the progress of finances, crunching numbers, the whole nine yards. Anyhow, below is a list of the most popular and proven budget models for businesses. Read through them carefully and compare each one to the unique needs of you and your business before making your decision.
One of the best budget models is the zero-based budget. Simply put, the zero-based budget definition is telling every dollar you earn each month where to go. With this budget model, your income and your expenses will always balance out to zero. If you make more money than your expenses, with a zero-based budget, you will need to “spend” that extra money. There are few budget models more beneficial in the long run.
You’re not finished with your monthly budget until you reach a zero every time. The point of “spending” your extra money each month is to get the full potential out of every dollar. Spending doesn’t mean “losing.” If you have $750 more than your expenses, you can budget it to save, invest, or pay off debt. Once you have planned every last penny, you’re good to go.
This is a great budget model for businesses determined to achieve optimal growth.
This budget model isn’t difficult to understand. A flexible budget definition would be a budget that flexes as the amount of money changes that your business spends or earns. A flexible budget can be drastically different from month to month depending on variables such as fixed, variable, and semi-variable costs. It is excellent for a business that does not deal with the same amount of income or expenses each month.
Fixed costs are costs which are the same each month, like your rent. Variable costs are things like hourly wages, sales commissions, and the cost of raw materials. Semi-variable costs are both fixed, and variable, such as the operation of a vehicle over a year. You will pay certain fixed costs, like registration and insurance, as well as variable expenses like fuel and repairs.
A flexible budget model has two parts. Each part is a budget in itself. The first part is a fixed budget which does not change much from month to month. Budget items are fixed semi-variable costs. Remember to include rent, utilities, payroll, and other regular expenses in this first part of your flexible budget model.
The second part of the flexible budget model is the variable budget. This budget includes your variable items. Part of the budget may include spending, inventory, taxes, investments and other costs which are rarely the same number twice.
Incremental budgeting is more of a budgeting technique than an actual budget model. It’s viewed as both and is beneficial either way. An incremental budgeting definition is essentially the act of going over a previous budget and increasing it in increments. Incremental budgeting is continuous, but in the same manner, can be applied to a budget at any time, including in-between accounting periods.
Typically, your current budget is what you use to apply incremental changes to your business, based on your budget’s performance. This is an excellent form of managing your business’ budget because there are no in-depth paperwork or analysis reports to complete. Just go over last year’s numbers, your current goals, and this year’s projections.
In the end, all you are doing is taking a pre-existing budget, seeing what worked, what didn’t, gaging which areas need reduction and which need boosts. Incremental budgeting is a fantastic method for slowly upgrading and tweaking your business’ budget while not making any serious changes. More or less you are increasing when and where you need it, and nothing more.
A rolling budget is quite similar to incremental budgeting. Some might say they are the same. However, there are some minor differences. The rolling budget definition is, effectively, incremental budgeting explicitly dealing with annual budgets or budgets that are rolling over from one accounting period to the next. This is where they differ, as you can do incremental budgeting any time.
This budget model focuses on rolling over the previous accounting periods budget into the next accounting period. Each new pay period, you amend the budget and adhere to the new one. Each amendment takes into accounts any changes in productivity, profit, expenses, and other vital variables that affect the businesses cash flow as well as overall debt.
Tracking the Budget Model
Avoiding overspending, underinvesting, and poor financial decisions though choosing a budget model are essential. However, following up by monitoring the chosen budget model is just as crucial as selecting the best one for your business in the first place.
Tracking a budget allows you to both have a clearer view of your financial picture and keep a tighter reign on overspending. Some of the best strategies for budget tracking include:
- Apps for Smartphones and Tablets
- Online Spreadsheets
- Handwritten Ledgers
- Websites such as Credit Karma which monitor credit ratings
Tracking your new budget model from month to month is the best way to tell how effective it is. Any areas which aren’t performing optimally can thereby be properly adjusted. And any changes to your financial situation, like losing and gaining income, can be incorporated into the overall budget adequately.
Sticking to the Chosen Budget Model
Sticking to your chosen budget is a big deal. As mentioned above, it is not the end of the world if the budget you choose doesn’t work out. There is always room for tweaking things or even switching budget types altogether.
However, there is such a thing as giving up to soon. Sometimes finances get tight, and no matter what budget you use, it is the actual profitability that is lacking and needs to be adjusted somehow.
There is a time to stick with a budget, and there is a time to build a better boat and abandon ship. Make sure that you aren’t “the man who quit too soon,” which if you’re not familiar with the story, it is an excellent one. You can read about it here.
Without sticking to the chosen budget model, poor finances will surface and destroy all that you love and care for, or at the very least make it hard to run a profitable business and do things like expanding or investing.
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