For businesses large and small, a proper budgeting system is its lifeline and making the annual budgets is always a very taxing exercise for the owners who are often at a loss where to start or how to make it more accurate given that there are so many variables and the environment is dynamic. Some practical tips on crafting a budget that is practical and effective:
Appreciate the Purpose of the Budget
A budget is not meant to be a statement of accounts for managing every penny but rather a tool that can assist you to make better financial decisions and open up areas for improvement. It is extremely important to have the right mindset for creating and implementing budgets as if you have a negative attitude, it is very likely that you will see it as being restrictive but with the right attitude, you can consider it as an enabling tool that can make your business operations more efficient and effective. Ask your accountant regarding which type of budget to adopt as you can have a budget either on an accrual basis or on an actual cash flow basis. Many of the larger business implement both the types because of the better controls they provide.
Know the Operating Environment
Most small business owners get confused when making budgets because they assume that the exercise can be done once annually. However, if the business is subject to seasonal influences, it can be a good decision to break it down to smaller intervals like quarters or even months so that you can stay on top of the income and expenses. A https://www.forbes.com report quotes Kristen McAlister, President of Cerius Interim Executive Solutions, “There are a number of situations where the revenues are so erratic that doing a budget and trying to benchmark against it is seen as a waste of time when you could be spending time on the business. Thirteen-week cash flows are easier to keep updated to the ebbs and flows of business and provide a better picture of reality to make business decisions from.”
Build a Team to Implement the Budget
Business budgets should neither be created by just one person nor implemented alone. Ideally, the budget should be a product that is arrived at by getting on board the people who are in charge of the various functions and are supposed to be accountable for the performance. Most budgets that fail are because they are thrust on people who were never consulted about it. Another reason why budgets should be built by a team of people is that then it can include all the different perspectives that make up the business. As much as the budgeting team should include people from the finance department, it should also have participants from the manufacturing, logistics, human resources, marketing, etc. functions. For example, if getting out of debt is a priority, it is obvious that you will need everyone in the company pitching in.
Make the Budget Realistic
While the budget should reflect where the business aspires to be, you need to take care to ensure that the goals are realistic and based on a true assessment of the capabilities of the business, the environment, the market potential as well as the past performance. A good starting point for businesses that have been in existence is to analyze the figures of the performance form the past five years and use it to project performance for the next few years after taking into account the developments in technology and the environment. Find out what the fixed costs of the business are and then build in the variable costs for a number of production scales. By finding out what you can achieve with the given constraints, you can work out a detailed budget that is practical and realistic.
Be Conservative but Flexible
Always remind yourself that there will always be certain things that remain in the realms of the unknown when making a budget and these things can impact the fortunes of the business. When there are things that you cannot anticipate, you should have a strategy to deal with them. You can have a special reserve fund to meet the unanticipated costs or even build in something extra with each individual line item to compensate for the unexpected. Use the strong performance of the business in any year to build up a reserve fund that can be used to keep the business stable when the inevitable business downturn does happen.
Business budgets are not meant to be cast in stone; it is a living document that may need to be revisited and altered several times in a year to keep it relevant to the changing market conditions and operating environment. The more often you can make changes to the budget, the better the ultimate results will be. Waiting for the full year to find out how you performed is a sheer waste of opportunity.
Make the Budget Detailed
For budgets to be really effective in managing fund allocations, you need to make it really detailed. Of course, you need to draw a line where it should be because adding unnecessary detail is counterproductive. Make it a point to track business expenses according to how your accounts function is set up. Also, try to take a fresh look at each of the expenses and see whether they can be clubbed together. It may also be beneficial to ungroup items from a major head for more accurate tracking; for example, employee benefits may be split according to the type of benefit; retirement benefits, health insurance, sick and vacation pay, etc. Having a budget that is finely detailed makes analyzing deviances easier and to set right the anomalies.
Conclusion
It is counterproductive to keep the budget a secret. The more people within the organization who know of it and are invited to play a part in constructing it, the more participative it will become leading to increased feedback, better communication, and greater transparency. You can incentivize employees based on their performance in relation to the budget leading to more empowerment and better motivation.
Author Bio
John Bell has been writing articles on Social Media, skilled business consultant and Financial Adviser for the last few years. In this post, he has written about the benefits of Social Media Marketing, Business, Finance as well as the features related to the same. For more please visit nationaldebtreliefprograms .
