A budget can be described as a fiscal procedure set out to control cost and expenditure based on an organization’s proposed yield, returns, and means for a period, usually a year.
Small firm partners may drive their organizations without acknowledging the demand for a budget. But, if you are aiming at being in business, you must support your plans.
Financial Planning is the most efficient approach to manage your cash flow, allowing you to invest in new opportunities at the right time. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period of a year.
As your business grows, your total operating budget is likely to include several individual budgets such as your marketing or sales budgets.
The Benefits of a Business Budget to your Business
Benefits of drawing up a business budget may include:
- The need to manage your money effectively,
- The value of a proper distribution of resources to business projects,
- Meeting the organization’s objectives, goals, and aspirations,
- Improving overall business decisions,
- Identifying problems before they occur – such as the need to raise finance or cash flow difficulties,
- Planning for the future of the business ventures,
- Staff motivation and,
- Business performances monitoring
Checking your Business Performance:
Budgets are valuable tools for testing the performance of a company at the end of the time that the budget covers. Owners should look at actual expenses, for example, as compared to budget, or planned expenditures. By doing this, the business owner can discern how much actual expenses varied from planned expenses to improve budgeting in the next planning period.
The Same applies to the revenue side of the equation. Owners want to know if the planned revenue equalled actual revenue as this will help them plan revenue inputs for the future.
But, to boost your business’ performance, you need to understand and watch the key “drivers” of your business – a driver is something that has a major impact on your business.
There are lots of factors affecting business’ performances, so vital to focus on a handful of these and check them. There are three major business drivers and they are:
- The Company’s Sales;
- The business running Costs and,
- It’s Working capital.
As business owners, you should not see budgeting as a gruelling task, but perceive it as a plan to bringing the pieces of the puzzle together, your business. If you try to follow your budget, making allowances for changes, your time management will be much easier and ultimately make business life stress-free.
Our Opinion; (Biz Dev & Strategy)
Essentially, Financial Planning forms the baseline for a company’s future performance. Managers create the budget expecting financial conditions and market expectations for future periods. These managers calculate revenues and expenses for the period being budgeted. When the period reflected in the budget arrives, the managers compare actual expenses to the budget numbers and test the department’s performance.
How to Plan your Business Budget
Developing a company’s budget involves every department within the organization. The sales department expects market conditions and estimates future revenues to create a sales budget.
The production department uses this information to create a production budget expecting material, labour, and overhead costs. Administrative and selling managers expect their expenses for the upcoming year. While the budget manager coordinates the communication between each department and compiles each section into a master budget and creates budgeted financial reports.
Measuring your Actual Results:
As the bookkeeper, the accounting department records transactions in the general ledger and creates regular financial statements to communicate the financial results for the company. The accounting unit creates financial reports which communicate sales records and department expenses for individual departments.
The department further distributes the departmental reports to departmental managers and delivers the complete set to the budget manager.
Assessing your Budget Variance:
The budget manager has the responsibility of comparing the actual sales and expenses to the budgeted sales and expenses. Gaps between the actual and budgeted amounts equal the budget variance. He combines the actual numbers, the budget numbers, and the budget variance numbers on one report for each department. And he distributes this report to the department managers and their superiors.
Measuring Performance with Budget Variances:
Business Managers use Budget Variances as a tool for measuring how individual department heads do. The larger the variance, the more questions superiors ask of the amounts. Hence, department managers must explain the reason for the budget variance.
If the budget manager has a reasonable explanation or proved beyond a reasonable doubt it was out of their control, their performance is positive. But, if the budget variance exists due to mismanagement by the department manager, the manager’s evaluation will be negative.
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