Planning provides a way to deal with the unexpected changes that arise. Not only that, but the process of creating a budget can provide a better understanding of your overall business. In the early stages of creating a budget you might hear yourself saying something like, “What? I had no idea we pay that much for electricity!”
When you put serious effort into a budget, over time you become much better at forecasting, and your budgets become increasingly helpful in your efforts to meet financial goals. As your budget becomes fine-tuned, it can serve as a road map of where you have been and the direction you want to go.
Save Time and Frustrations
Do not use the excuse that you do not have time to budget because, in the long-run, your budget will provide guidance that could inform decisions and save time and frustration.
You may find that just the exercise of listing all the revenue and expense categories is eye opening. For example, you may discover that you’re paying for things you shouldn’t, such as insurance on obsolete inventory that can be disposed of or renting storage space that sits empty. It might even highlight fraud. For example, if an unexplained spike occurs in a cost category, that could indicate someone within your ranks is cooking the books.
Forecasting revenue presents the greatest challenge in creating a budget, but making revenue projections offers you an opportunity to think about the steps you can take to generate sales. These steps might include introducing a new product or service, launching a new social media campaign, moving to a new location that will be more customer friendly, or other options. No guarantees exist, so while you can be somewhat optimistic with your revenue projections, be realistic.
Remember, cash may not come in the door when you make a sale. And you won’t likely pay all of your business bills in the month you receive them. To see where you stand, begin with:
- Determining how much cash you expect to have at the beginning of the year,
- Adding the amount of cash you hope to bring in for each month, and
- Calculating the amount of anticipated outflow.
Unlike a regular budget, you should update the cash flow projection monthly, to make sure you won’t run into a cash drought and have a sudden need to take out a loan.
On the expense side, your bookkeeping system will be your guide to setting up budget categories. Use the historical data provided by the checks you’ve written as a starting point: utilities, insurance, building rent, and so on.
As you move through the year, you will add to your budget the monthly actuals to show how you perform relative to your original expectations, but you do not change the budget itself. If you do, it becomes harder to piece together how the year turned out compared to what you anticipated. Those budget variances will hold important lessons for the preparation of your budget the next time around.
However, leaving the budget as-is does not mean you can never deviate from it. Times will arise when you will have to deviate to continue operating, such as when the local utility company raises rates. Let’s say you budgeted $20,000 for the year’s electricity, and by the ninth month you’re already over that amount. It might be tempting to increase the budgeted amount so that your budget looks better, but resist. Instead, when you go to make the next year’s budget, you can use the necessary deviations to more accurately estimate what you must spend and what you should reasonably anticipate.
Arrange Low-Cost Financing
As you put your budget together, you might discover that you need some kind of financing to see you through the year. The interest and principal repayments become two more expense categories you will need to build in. This discovery might save you from the nasty surprise of needing quick cash and help you avoid higher-cost financing to cover those cash shortfalls. Generally, the faster you need to get cash, the more you pay for it.
You will probably need to begin work on the following year’s budget before your current budget year ends. Whatever the timing, remember that you do not budget for the sake of budgeting. Review and consider the implications of budget variances — and there will be plenty — from the current year to prepare for an even better business plan (and corresponding budget) for the following year.
Take the Next Steps
An accurate budget benefits your organization, so do not hesitate to create and revisit your budget. Call, email, or complete a contact form to speak with a Hantzmon Wiebel team member today about how to make your budget work for you.
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