Budgeting in Your Business

Accountants have always been extolling the benefits of budgeting and planning to whomever cared to listen. And now, given the current economic situation, there is a sudden and renewed interest in budgeting by business owners all over the country. Budgeting is an estimation of revenues and expenses for a specified period of time in the future. Whether it’s a startup or an established business, budgeting is critical because it leads to effective financial planning.
As your business grows, you may delegate many responsibilities to your staff, and you will have less control over each and every aspect of your business. Budgeting will help keep you informed about the allocation of resources and keep track of all your finances. Comparing your performance in line with your budgets will enable you to analyze the operations of all your departments and staff.
Particularly in SMEs or family-owned businesses, it is very important to determine the right budget and then stick to it. Budgets are easier to make than to follow. Inability to adhere to the budgets is the primary reason why many businesses fail. Smart business owners prepare monthly budgets to compare variances between the actuals and planned budgets and work on those areas.
You should make it a practice to generate a monthly budget vs. actual accounts report to track your performance. The longer you delay the process of comparing your performance, the harder it becomes to catch up. If there appears to be a substantial difference between your budgets and actual numbers in any department, a thorough analysis of the reasons should be done. Variance is not always a bad thing to happen. Your sales can also increase because of unexpected demand, and the expenses will also increase in line with that.
In your strategic plan, you need to think about the direction of your business and set your goals and objectives. Budgeting is about allocating your resources to work towards those goals. Budgeting involves a great deal of planning to achieve your targets. If you know exactly what you want, it makes the whole exercise easier. As part of your planning process, you must come up with a set of financial targets, these could include sales, gross profit, net profit, and an optimum cash position. The optimum cash position is the amount of cash you want to always have in your hands. Once the goals are clear, you can start working towards them.
Every business has a unique set of needs, and their budgets have to be set accordingly. There is a range of software for budgeting available in the market which you can customize according to your requirements and priorities. Alternatively, you may wish to use a simple spreadsheet to develop the budget. If you have a good accounting system in place, it might have a built-in budgeting system, or alternatively, it should be able to compare actual and budgeted expenses side-by-side. Any system you choose should provide you with various reports depicting the key trends in your financials. Most off-the-shelf packages are very comprehensive and will meet the requirements of most SMEs.
Business owners are often short of time because they bear so much responsibility for their day-to-day operations that committing significant time to crunch numbers is not one of their priorities. However, budgeting provides a specific benefit by helping you to control your expenses. This is critical for the survival of your business.
For example, if you have a limited amount of money to spend on a certain raw material, you might do extensive research to look for a low-cost supplier to stay within your budgets. All the effort pays off in the end. Budgets cannot be made single-handedly, and all the relevant people should be involved in the planning process. Budgets should be accurate, realistic, flexible, prioritized according to business needs, and incorporate the goals of the business.
Use your budgets as a motivational tool for your employees and set out incentives and rewards when they meet the planned budgets. It will also help in the evaluation of your staff as the budgets can be used as a benchmark against which you can compare the performance of the employees. From the employees’ perspective, achievement of the budgets is one of the job satisfaction measures. While the budgets should be realistic, they should also incorporate a certain level of challenge for you and your employees for your company to grow.
This is more important nowadays as many business owners are focused on survival but would benefit from focusing on opportunities to thrive.

The writer is an Australian Chartered Accountant, International Author and Management Consultant. He can be reached at amer@amerq.com

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