Your business opportunities improve with the use of a budget, a powerful tool which assists you in achieving your financial goals. A well-designed budget helps you:
1. Predict income and expenses
2. Control cash flow
3. Communicate financial goals
Developing a budget for your business on an annual basis allows you to review its overall operations.
Benefits of Budgeting. Budgeting also permits you to identify those factors that are key to the success of your organization. These factors can be monitored closely throughout the year and adjustments can be made for critical elements.
Communicate Expectations. A budget documents your goals and expectations for a given time frame. You may want to share your budget information with people inside your organization and with significant third parties, such as bankers.
Anticipate Future Cash Needs. Cash flow is the life-blood of any business. Budgeting allows you to look at anticipated sources and uses of cash to determine cash needs for the year. These estimates can be helpful in determining if there will be sufficient cash flow for the year’s operations or if additional sources of cash will be needed to attain financial goals.
Monitor Actual Performance. Actual business results most likely will differ from your plan. By comparing actual performance to anticipated performance, you will be able to examine the variances and determine the business factors which caused these differences.
Enhance Decision-Making. The information derived from comparing your budget to actual results will enable you to modify some of the operating elements of your business. In this way, a budget may lead to more practical decision-making. The process and mechanics of budgeting vary by organization.
Generally, budgeting consists of three phases: research, analysis and documentation and communication of the budget. Each stage can provide valuable insights into your business.
Evaluate your revenue position. Who are your customers? Who is your competition?
What economic or technological changes are occurring that may affect your revenue? These and many other questions about your market and your position in that market must be addressed. After carefully evaluating these factors, you can establish realistic revenue goals.
Understand the cost structure of your business. To generate desired sales volume, you should recognize the costs involved. What costs are incurred in a year? Which costs are variable and which are fixed regardless of the volume of business activity?
Are there unusual, nonrecurring costs which should be anticipated? All costs should be estimated based on the volume of business activity planned.
Research your competitors’ businesses. Where are your competitors focusing their efforts? How well do you compete with others in your market? What are your competitors’ revenue and costs? How are their cost structures different from yours?
Understanding the revenues and costs of other competitors in your market can help provide guidelines for evaluating the reasonableness of your own cost structure.
With the information derived from the research phase and an understanding of your own goals, you can analyze possible revenue and expenses for the next year. After analyzing these alternatives and evaluating the impact of each on the future of your business, you need to decide on one set of revenue and expenses to represent your expectations.
3. Document and Communicate the Budget
By itself, the budgeting process is helpful, but many more benefits can be gained by documenting and communicating the final budget. To ensure that your budget is an effective management tool, you must be able to compare budgeted and actual results. For example, a budget that measures sales by type must have a reporting system which provides this financial information.
Budgeting enables you to visualize the future of your business. Using a budget as a benchmark, you can more readily identify where actual performance differs from planned performance. This insight will lead you to adjust the actions of your organization accordingly.
Tim Dilley is a Certified Public Accountant with Cordell, Neher & Company, PLLC, a Wenatchee public accounting firm. Tim may be reached at 509-663-1661 or firstname.lastname@example.org. cnccpa.com