The Green Sheet Online Edition
August 09, 2010 • Issue 10:08:01
Budgeting: A crucial management skill
The process of creating, monitoring and controlling an annual business budget is a critical management skill for any successful business owner. Once you set your company's goals for the coming year, developing a budget helps you to:
- Determine what products and services are profitable or need to be eliminated or repriced
- Assess how much money is available for advertising and other discretionary items
- Provide a roadmap for monitoring business income and expenses
A budget is the basis of every financial plan, the foundation that companies and individuals build on to reach their financial goals. Some people consider a budget an exercise in futility - something to mark off the "to do" list and stick in a drawer until next year.
Other people carve it in stone and never adjust it throughout the year. Finally, there are the people who understand the purpose of the budget; carefully craft a realistic, thoughtful budget; and adjust it throughout the year as necessary.
Some people feel only large businesses need a budget. However, businesses of all sizes should have a budget. It will help your enterprise become financially sound by focusing on the fundamentals of everyday business. The larger your business, the more detailed your budget should be.
Most businesses with a fiscal year of January to December begin the budgeting process in the third quarter of each year so their budgets will be ready at the beginning of the new fiscal year. Rarely is a budget completed on the first effort. It frequently requires edits and revisions. Be patient. Set aside the time needed to carefully consider the budget. When completed, your budget will help you achieve success and reach your financial goals.
Elements of a budget
The website www.answers.com defines a budget as "a spending plan used to allocate resources to accomplish an organization's objectives. This management tool coordinates anticipated expenditures to maximize resources. A budget is time-specific, and it must be flexible to respond to financial and programmatic changes."
The website www.wikipedia.org defines it a bit more simply as "a list of all planned expenses and revenues. It is a plan for saving and spending."
Large companies generally have a master budget with a projected balance sheet and income statement. Each master budget contains operating budgets for individual departments, divisions, business lines or units.
Detailed by month or quarter, a good budget allows for adjustment or realignment based on actual income and expenses. The budget is never a rigid or fixed document; it always allows for modifications based on real-time circumstances.
Smaller companies may have a very simple budget that allocates expected revenue and expense distribution throughout the year. It, too, is flexible enough to allow for adjustments when revenue falls short of projections or unexpected expenses arise.
Benefits of a budget
There are several reasons why budgeting and business success go hand in hand. Budgets allow companies to:
- Evaluate: Budgeting encourages definition of goals and expenditures. It helps control costs by not allowing some expenditures, assigning responsibility for various expenses, and setting benchmarks for evaluating business lines, departments or individuals.
Estimating and matching income to expenses helps owners and managers determine whether they have enough money to fund operations, expand the business and generate income for themselves.
- Organize: Budgeting helps business owners organ-ize finances and identify the company's overall financial health. By reviewing the company's past financial data and creating a budget for the coming year, owners and managers can identify exactly where the revenue was derived and where the money was spent. Without this data, a company cannot know exactly what is going on.
- Plan: Budgeting allows a company to review its past performance and determine what goals might be attainable during the coming year. Creating a realistic budget also helps a company determine if it needs to add or remove products or services and whether to adjust pricing to meet the market.
Without a budget, there is a risk of spending more money than is taken in or not spending enough money to grow the business and be competitive. Budgeting also allows business owners or managers to evaluate the entire business and amend plans as needed.
- Control: Companies without a budget aren't aware of their spending habits. Frequently, they only know that their money is gone before the end of the month or year, and they have no idea where it went.
A realistic, carefully crafted budget will help you determine if your business is generating sufficient income to remain viable, as well as help you plan for unexpected emergencies. A budget will also help highlight trends and prevent crises. Unexpected situations can always arise; however, a thoughtful budget can allow flexibility for unforeseen circumstances.
- Communicate: A budget is an invaluable tool for communicating organizational goals and promoting friendly competition among employees, departments or divisions to meet and exceed the goals through financial or other types of incentives.
Most businesses involve all stakeholders in creating the annual budget, and the process takes time and effort. Once your company goals are set, communicating with your employees and allowing them to participate in the process encourages them to embrace both the goals and budget.
- Measure: Obviously, the main goal of every business is to make a profit. But how do you know if you make a profit? Simply having money left over each month doesn't sufficiently measure your success.
Good budgeting and financial control allow you to track all revenue and expenses and to calculate your success, or failure, at making a profit. Periodic evaluation of your budget and comparison to actual figures enables you to track exactly how you are doing, recognize what you need to adjust, and identify steps to take in the coming months or quarters.
A vital skill to master
As with most management skills, budgeting is not easy to master. Fortunately, numerous tools exist in the marketplace to help you learn new skills or strengthen abilities you already have. Entering "business budgeting" at www.amazon.com elicits almost 8,000 hits - from books to software.
In my next article, I will discuss the process of creating a budget for fiscal 2011.
Vicki M. Daughdrill is the Managing Member of Small Business Resources LLC, a management consulting company. E-mail her at firstname.lastname@example.org or call her at 601-310-3594.
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