Without a budget, the business owner is literally shooting in the dark when it comes to trying to create an action plan for a company. A solid budget identifies current available capital, estimates expenditures and anticipates revenues.
“Businesses should continually refer to them as a way of measuring performance against expectations.”
Think of your budget as a planning tool. Use it to attain your goals by determining how much money you can spend on different elements of your operation.
Your periodic budgets should be archived so you can revisit previous periods (for example, month-over-month or quarter-over-quarter) and evaluate whether your company’s results are improving. A master budget provides an overview of financial activities involving assets, liabilities, equity, revenue, expenses, and costs over a specific period.
Owners first develop a master or static budget with numbers based on planned inputs (sales revenue) and outputs (expenses). Think of this data in very simple terms. You’ll use it to estimate what the firm will take in from sales revenue and what the firm will pay out in expenses.
Businesses also use budgets to control expenditures for specific periods by comparing what was spent during that period to the master budget. Continual monitoring of expenses and revenues should prevent businesses from exceeding their budgets.
Ideally, budgets should contain some flexibility.
Expenditures and revenues often will stray from their forecasts. You may receive an unexpected discount from a vendor, or your sales may exceed your best guess estimates for any given period. Or, you may incur unexpected charges during a time when sales drop without warning. Successful businesses are able to adapt and compensate for those changes.
Evaluation of Performance
Budgets are a valuable tool for evaluating your company’s performance and the efficacy of your budget. Owners can use it to review actual expenses, for example, as compared to the estimated expenditures. If there’s a large divergence between the two, the owner and the financial planner can review the budget for flaws.
Preparing a budget can be a lot to get your head around. All those numbers spread among so many tasks over so many months can leave you dazed. But, it’s an essential part of maintaining your business, as important as any marketing plan or advertising campaign. After all, you can plan for either of those unless you know how much money you can spend.