- March 22, 2019
- Posted by: admin
- Category: Accounting Advice
Baseball teams keep score by counting runs. Football teams keep score by counting touchdowns. When you have your own business, counting money is the way to keep score. It is extremely important for you to know where you stand from a financial perspective. A budget is a critical component to your financial and operating game plan.
Knowing what you want to accomplish strategically is absolutely vital and measuring against this objective is paramount. A budget is your game plan. Not creating a budget is like driving down a dark street at night with your headlights off. There is no way to see what is coming down the street and no way to tell if you’re going to drive into a wall.
Do you have the right budget?
Budgeting is nothing more than formulating a coherent financial plan for some period in the future, usually one or two years. As the plan is implemented we are able to rate our efforts compared to the budget that we created. Budgeting allows us to predict the number of technicians, vehicles, equipment, etc. that we will need in the future based on our revenue projections.
While many business owners think that they are too busy to do budgeting, there is nothing further from the truth. You see, the reason that most small business people do not budget is because they are so concerned with putting out the fire of the day as well as meeting payroll each week that they rarely take time to plan. Lack of planning continues a vicious cycle that underscores a relationship between the failure of a business to maximize its profits and the absence of planning. If you are running a growing pest management firm you can’t afford not to budget for the future.
During the budgeting process, we determine the areas of spending that we can reduce as well as analyzing revenues to determine which are the most profitable and if there are other sources of revenue that can contribute profitably to the bottom line. Budgeting should be done annually and actual results should be compared to budgets monthly.
Keys to a Successful Budget:
- Create realistic sales and expense forecasts
- Make realistic goals based on your current income and expenses
- Look at it often and adjust to achieve your goals
Do a Reality Check
A budget is not something that is pulled out thin air. It has to be based on figures that can be supported by reasonable expectations. Those expectations are based on a combination of prior financial performance and anticipated business growth (or reduction).
To gather the information you’ll need, you’re going to have to consult with other people in your organization. Your accountant should be able to provide baseline figures from prior financial periods while others in your company can provide a reality check about anticipated sales and expenses.
Specify a Timeframe
Budgets are prepared for a specific time period. They are often done for a year at a time, but you may also want to budget on a monthly, quarterly, or semi-annual basis.
Even if you prepare a budget based on a year, you should seriously think about breaking it down on a month by month basis. Accounting programs such as QuickBooks makes this easy by offering a variety of formatting options.
Estimate Income and Expenses
In its simplest form, your budget will be an estimated plan of your income and expenses for the specified time frame. For a cash-basis budget, income will include any payments you receive from sales, accounts receivable, interest, dividends, or virtually any other source.
Expenses, on the other hand, represent funds that leave your business to pay for materials, payroll, administration, real estate costs, utilities — the list goes on and on. No matter how carefully you plan, you will undoubtedly encounter some unexpected costs along the way, so try to leave room for them in the budget.
It’s also a good idea to consider when income and expenses will be incurred. For example, if your firm is highly seasonal most of your income will be received during the warmer months. Budgeting your annual income evenly over twelve months would not accurately reflect your situation. A much better approach would be to budget the income for the months you actually expect to receive it while including the costs that are incurred year round by month.
Using Your Budget to Control Costs
Your budget must be a vibrant document, one that is well considered and that is used on an ongoing basis. Use it as a real-time reporting system. Don’t look at how you’ve measured up to your goals months or even weeks after a period has closed. Check the important elements (direct costs as one example) far more frequently.
Use a Line Item Method
When you created your chart of accounts, you created a list of general categories such as office expense or repairs and maintenance. When creating your budget look at your chart of accounts and determine what your sales will be by month, by category and how much you will spend in each expense category in each month.
This will give you detailed information on exactly where the money is being spent so you can monitor and correct any serious excesses. Comparing your fixed expense to the budget and the amount spent a year earlier on the same items is a good way to see if you are still in line.
Give Budget Authority to your employees
A critical element in the delegation of work and authority is assigning responsibility for expenditures and bottom line outcomes. At the beginning of each period, identify the amount of money budgeted for in each area of your business and assign that area to a manager. Then on each reporting period, check the results of their expenditures against the amounts budgeted and how that person did in terms of working within the budgeted amounts. Perhaps you can include an incentive program for those who come in under budget. Whether in the corporate world or the world of small business, it is human nature to spend all the money in the budget because there is always some piece of equipment to upgrade or replace. Put a price on resisting that urge, and don’t forget to explain all the reasons behind budget decisions.
Know where you want to go in your business in terms of growth, profitability, and time frame. Make a plan. Reduce the plan to a line by line budget and execute on the plan. If you take these steps in the future you should find that you have better visibility and may avoid costly errors.