Creating and Managing a Budget

Why do I Need Budget?

A budget can help to plan and control your future income and expenses, it is an itemization of likely income and expenses for a given period of time. It can be used as a strategic plan of a business. Whether you are creating a budget for personal use or for your business.  Without preparing a budget a business may not be able to assess its resource to buy capital assets or know whether its revenue, or if its will exceed expenses or expenses will exceed revenue. To create a budget, whether for personal use or for your business, incorporate the following steps:

  • Set Goals – Make a list of your financial goals and when you wish to accomplish them.  You can set both short-term and long-term goals.  Short-term goals are those you wish to reach within twelve months.  An example of a short term goal may be to save enough money in six months for a vacation.  A long-term goal is usually five years or longer, you may wish to save 20% of the value of purchasing a new home in the next five years.  When setting a goal for the long-term remember to consider inflation over the passage of time.
  • Evaluate Your Income – How much disposal income do you take home each pay-period.  Do you have savings in a bank such as cash, or a money market account?   If you are creating a budget for your business, consider whether you have a net income or net loss after paying all expenses for the company, do you have a positive cash flow?
  • Identify Your Spending – Determine what are you recurring and/ or fixed monthly expenses each month.  How much is your rent or mortgage, car note, utilities etc.  What are some of your variable expenses that you can cut back on? You may decide to mostly prepare your meals at home and cut back on restaurant dining.  Make a decision on those optional expenses that you can eliminate.
  • Create Your Budget – Create an excel spreadsheet, or purchase a budget software and identify your goal at the top of the sheet, example, “Save $5,000 in 10 months for My Dream Vacation”, this would mean you have to save $500 per month for the next 10 months in order to meet your budget.  Next list your monthly income and all your expenses, both fixed and variable, if your total savings after listing all your income and expenses is not equal to or more than $500, you will have to either reduce your monthly expenses, more likely those variable expenses such as groceries, utilities, etc. or find additional income to meet your budget.

If you stick with your budget and keep your goal in mind you will reach that goal. Of course, there may be circumstances that requires an adjustment to the budget, if your financial conditions change, adjust the budget to a realistic amount and stick with it.We hope this blog provided useful and valuable insight on Creating and Managing a Budget.

For more information and insight email us at [email protected] or contact us at (301) 974-4568.

Diana McCalpin is an accountant who manages a Certified Public Accounting Practice in Laurel, Maryland which performs audit, accounting and tax services to customers. She loves to share information with clients to help them grow their businesses and be profitable.

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