MoneyWatch: February 2008

Budget

Budget is a scary term and idea to many people. It conveys connotations of sacrifice and deprivation. However, budgeting should not be viewed in such a negative light. Creating a budget is essential to analyzing the overall financial situation of your business or your family. It is a great way to set financial goals and, over time, achieve them. Ever wanted to save money to purchase a car, increase profits to make a business more successful, or just have a better understanding of how you spend your money? A budget is the tool needed to help achieve these, as well as many other, financial goals.

At its core, a budget, whether it be for a small business or an individual, is just an estimation of total cost and total income. Often times, especially with businesses, there are many costs and sources of income that make starting a budget seem overwhelming and tedious to maintain. Here are some tips from PersonalBudgeting.com and Microsoft.com on how to start a simple budget plan.

Keep it simple (at first)
Get started by putting together a basic list of all obvious sources of income and costs, (e.g. sales, rent, insurance, utilities). As time goes on, it will become more apparent what other income or costs need to be added.

Use the past and be conservative
Look at previous expenses and incomes to help determine what a good estimation should be, (e.g. invoices, monthly billing statements, pay stubs). Try to err on the conservative side. Overestimate costs and underestimate incomes.

Choose a time period and convert
Often a month is chosen because many expenses and incomes are already or can easily be divided into monthly amounts. However, any time period can be selected to fit the needs of the budget. Now convert all income and costs into the selected time period. For example, one time, daily, quarterly costs and incomes need to be changed to monthly amounts.

Create a chart and track actual costs and incomes
List estimated costs and incomes separately, but leave room for the recording of the actual amounts of each cost and income next to their estimated counterpart. Also total the estimated costs and incomes and record the amounts. Also there are myriad accounting programs, such as QuickBooks, that can help with the organization of figures and calculation of results.

Analyze and review results
After all actual figures have been recorded, calculate the total cost and income and then compare these to the estimated total values. How different were the totals? Use these results to change the estimated values for future budgets accordingly to maximize profits or savings. Be prepared to miss your budget estimations and stay flexible. Some months, especially at first, the estimations might not be very accurate. Budgeting is a trial and error system and these inaccuracies will eventually lead to more accurate budgets in the future.

Remember a budget should be a restraint, not a constraint
Even though a budget is a good tool to use, it should not be strictly followed. There will be instances when it would be beneficial to not follow your budget plan, such as an opportunity for an important investment.

Click on the links for more information.

Local budgeting and money management assistance

Cleveland Saves: Budgeting Workshops
WECO Fund: Help with Financial Planning
Key Bank: Financial Education Centers
DebtAdvice.org: Money Management Education

Small business budgeting resources

US Small Business Administration: Budgeting for the Small Business
HomeBusinessCenter.com: 7 tips to Set Up a Home Business Budget
Microsoft.com: 8 Ways to Make a Budget Work
AOLSmallBusiness.com: Creating a 12-Month Budget
EzineArticles.com: Budget Help for Small Business Owners

Personal budgeting resources

PersonalBudgeting.com: Budgeting 101
Salary.com: Help with Identifying Budget Costs
CNNMoney.com: Top Things to Know about Budgeting
PersonalMoneyMgmt.com: Simple Budget Worksheet
PersonalFinanceBudgeting.com: Various Budgeting Worksheets

Support for MoneyWatch is made possible by Charter One Foundation.

Research assistance for MoneyWatch is from Cleveland State University Nance College of Business Administration.