As you come to terms with the needs of the business that you have just started, you might realize the importance of budgeting. Having knowledge about the trade is a prerequisite while starting a business, but you also need to have a good amount of knowledge regarding the different accounting procedures. During the incipient of a business, budgeting comes across as a very herculean task and can be tough to manage.
In this article, we look at the business financing options available to organizations and what can be done to optimize the budget they have. Run through the article to find out how to optimize your budget.
Financing Options
Organizations today basically have two types of financing options or sources of finance available to them – internal sources and external sources of finance. The choice between these sources of finance is made based on a number of factors, including:
- The scale of the innovation or new capability that is to be picked up
- The requirements for organizations today
- The rate of financing
- The internal finances available to organizations
Internal Sources of Finances
Internal sources of finance usually include the following options:
- Short-term working capital and
- Long term fixed capital
We discuss each of these sources in the option below:
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Retained Profits
Almost all organizations, regardless of the industry that they operate in, return some of their profits on period basis. These retained profits are usually maintained in a separate capital account, and can be used to fund new innovations within the organization or can be used during times of emergency when the business is not performing as well and is unable to record a profit.
Retained profits can develop into a sizable amount with the passage of time which can come in handy for organizations looking to expand their resources and improve their business standards.
Most organizations save up their retained profits with a future objective in mind. If you have been setting aside retained profit to invest in your organization later, then you can do so in innovative capabilities without a second thought. However, an opportunity cost arises if you’ve been setting aside retained profit for some other cause but are now lured by the possibility of new innovations.
Sale of Assets
Selling assets to generate new capabilities and open new avenues is another internal source of finance that most organizations follow at the time of selling an asset. This is again a somewhat desperate measure and should be sought as a last resort than the initial response to a situation.
Your assets play a pivotal role in your operational and production processes, which is why you should realize the impact caused by their absence, before deciding to proceed with the sale. Any hasty decision taken in the heat of the moment can cost you a lot here.
External Sources of Finance
Almost all primary sources of finance or capital for a business come through external means. The very nature of capital is defined through its acquisition from external means and modes. External sources of finance include all financing acquired from outside of the business and for which the business itself was unable to provide sufficient resources.
External sources of finance which can come in handy for incorporating innovations within the organizational model include:
Bank Funding
Bank funding or financing is the first source of external financing seen within organizations. Bank funding includes funds and finance taken from an external financial institute, most often a bank for meeting and finding an end to cash crunches.
Bank funding is also available for long term loans that are needed to signal future growth curves and are also required to spell major innovations. The funding you acquire from the bank should definitely exceed the cost of the new capability you are about to incorporate.
Equity Shares
While small business owners might not be able to benefit from this option straightaway, equity shares are a good way to generate finance for investing in new capabilities. A share is exactly what the name suggests. It is a provision of participation in a company from external investors who benefit from dividends in return for their investment.
Ordinary Shares
Ordinary shareholders get a dividend based on the prosperity and success of the company. The dividends paid to ordinary shareholders will be generally high if the profits are higher. Similarly if the company does not make a profit during a period, the share prices will also dip and the ordinary shareholders will get no dividend from the company. Companies can get some much needed finance through this method, while selling a specific amount of shares in the open market.
Preference Shares
Preference shares are sold to investors that take little risk and require constant payments in return for the investments they make. The return should be in line with the percentage fixed with the preference shareholders at the time of selling the shares. These shares rank lower on the risk profile, hence charge less than others.
Debentures
Debentures come under long term loans or source of finance obtained by issuing a debenture. These come with a fixed rate and aren’t tied to the profit of the organization; neither does the organization have to hand over some control over to the lending party.
Debenture holders however do maintain some right over the business, as they can sell off assets if the interest payments to them aren’t made in time. This long-term line of credit can either be beneficial or messy based on the approach a business considers to adopt.
With ever increasing innovations and the rapid pace at which they is being adapted, organizations are in a race against time to be more proficient in their dealings and add more automation to their organization, even if it comes at the cost of external finance.
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Setting a Tech Budget
The process of budgeting requires estimating and managing the revenues and expenses of the business. The numbers come in handy when you are planning to develop your business, as the figures will give you a lot of help in deciding the course of action for the future. The following tips can be included in your techniques to make sure that you have planned a thorough budget, which is based as much on reality as possible:
Do Some Research on the Industry Standards
If your business has been operating for more than a year, then you would have a fair idea of the rates and costs associated with all of the cost heads. On the contrary, if your business is a start-up, you won’t have accurate information on your fingertips. A situation like this calls for you to start an in-depth study of all the averages present within the industry.
Information regarding the average labor rate per hour, the machine usage for one product and the annual fixed costs will be gathered by researching for the prevalent industry averages. Once the accurate numbers have been gathered, you can start integrating them within your plans to formulate a budget for the coming year.
Mention All the Details
Most big companies pay attention to all the details while formulating the budget for the forthcoming year. While paying attention to detail, it is advised to mention all the fixed costs, the variable costs and the direct/indirect costs as separate heads. All other trivial expenses should also be mentioned to add more value. This way, if you feel that you need to cut down on some costs, you can easily identify the appropriate cost heads and select the expenses that you want to cut down on. The attention to detail would also rule out the possibility of any confusion while viewing the budget in the future.
Cut Some Slack for the Imperfections
Even though you have computed in all accurate bits of information, it is still advised that you cut some slack for any change that might spring up in the future. For example, if the budget shows an annual gain of 100,000 and you need to plan an expansion of 90,000, it is recommended that you don’t just go ahead with the move until the gain is realized, considering that even the slightest of changes can leave you in a risky position.
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Conclusion to Optimize Your Technology Budget Setting Procedures
AWS Cost Management tool can help you prioritize your tech budget and give you the guidance you need to ensure cost optimization. A good budget can help solve long-term financial problems and provide a blueprint for the future. Call us today for additional strategies to optimize your technology budget to maximum benefit of financial resources.
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