A budget is a plan that is expressed in quantitative plans. It is prepared prior to a defined period of time and it is pursued during that time for the purpose of attaining given objectives.
Do not create a budget just for the sake of having one, you should have objectives as to why your business keeps running on a budget annually.
Budgeting is one of the first step to take to enable your business stands with crashed.
AIMS OF BUDGETING
- Business Structure
A budget is especially useful for giving company guidance regarding the direction in which it is supposed to be going.
Thus, it forms the basis for planning what to do next.
A CEO would be well advised to impose a budget on a company that does not have a good sense of direction.
Of course, a budget will not provide much structure if the CEO or Manager promptly files away from the budget and does not review it again until the next year.
2. Cash Flows prediction
A budget is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have irregular sales patterns.
These companies have a difficult time estimating how much cash they are likely to have in the near term, which results in periodic cash-related crises.
A budget is useful for predicting cash flows but yields increasingly unreliable results further into the future.
3. Resource Allocation
Businesses use the budgeting process as a tool for deciding where to allocate money to various activities, such as fixed asset purchases.
Though a valid objective, it should be combined with capacity constraint analysis to determine where resources should really be allocated.
4. Determing Performances
The objective in creating a budget is to use it as the basis for judging employee performance, through the use of variances from the budget.
This is a treacherous objective since employees attempt to modify the budget to make their personal objectives easier to achieve. Also your determination of performance is needed for understandable budget.
5. Modeling Scenarios
When a business is faced with a number of possible paths down which it can travel long distance, you can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction.
Though useful, this objective can result in highly unlikely results if management lets itself become overly optimistic in inputting assumptions into the budget model.
WHAT TO CONSIDER WHEN CREATING A BUSINESS BUDGET
- Start Early
Most businesses begin the annual budgeting process by September to allow sufficient time to ensure the best-detailed estimate is completed by the end of the year.
However, an annual budget should be monitored and updated on an ongoing basis, so it’s never too late to get started.
2. Consult the other Departments
The budgeting process should not be completed behind closed doors by accountant(s).
Instead, all the departments within the company should be consulted on their expectations for the following fiscal monthly or yearly.
This includes the sales team who can assist with realistic revenue assessments, the manufacturing or service team who can advise on costs of delivery and any large purchases required to update machinery, the research, and development team who can discuss expected costs as well as the timing on any new products anticipated.
3. Monitor, Evaluate and Reforecast
When you have completed the budgeting process, the biggest mistake you could make is to file it away only to pull it out again at the end of the following year.
A budget should be monitored on a monthly basis, or sometimes even on a weekly basis for smaller companies.
Budgets should be edited if circumstances change.
While it may seem advantageous to show investors that the company will significantly grow, eventually actual results may disappoint.
Even worse, business decisions may have been made using such projections.
When in doubt, it is a good idea to be more conservative if sales goals are delayed or not reached.
5. Calculate Cash Flow
While it is great to be able to put together a projected income statement, it is just as important to calculate the expected cash flow of the business.
These can be different considering that you may pay your bills faster than your customers pay theirs or you may need to purchase inventory well in advance of sales if acquisition time is significant.
6. Identify the Capital Expenditure
Often not considered in the budgeting process are those large or expensive purchases which are vital to the continued success of the business.
These may include new computers, systems, machinery, vehicles, furniture etc.
It is important to keep in mind that each new employee hired will likely require a certain amount of capital expenditure.
Investments in equipment or processes that are directly related to your product or service should also be considered.
7. Estimate the Revenue
The expected sales have a significant influence on the costs incurred, but can be very challenging to accurately project.
Consider the recent monthly growth rate experienced by the company and decide if that is able to be continued.
Review industry guides and other expert publications that focus on your industry and review financial information from a number of your competitors, if available.
Communicate with your current customers to better understand their expected needs of your product or service.
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