What makes a successful budget?
“An ounce of prevention is worth a pound of cure.” This is an adage that holds just as true in our daily life as does in business. Efficient business management must be based on careful operational planning to deal with activity levels in the coming months. Without a doubt, the first step in planning is to prepare a cash budget.
What is a cash budget?
A budget presents incoming and outgoing cash flows based on expected activity levels in the short- and medium-term. Budgets can be weekly, monthly or annual. However, it is not recommended to go beyond 24 months when preparing a budget in order to stay within realistic market data.
What is a budget?
On the one hand, a budget provides a portrait of upcoming activities and their impact on the organization’s operations and finances.
Additionally, once the budget has been prepared, it serves somewhat as revenue goals to be achieved and expense guidelines. The budget can also be an important management and performance measurement tool. There should be periodic comparisons of actual vs. budgeted results. A properly developed budget helps control finances, make informed investment decisions and adjust operations in line with the organization’s actual means.
Having a budget can also prove to be an indispensable tool when applying for financing from a financial institution. There are not many financial institutions that will grant long-term financing without having some idea of your business’s direction and whether its future activities will support loan repayments. A realistic, properly prepared budget developed with the assistance of a professional accountant will increase your credibility when looking for financing.
How to prepare a Budget?
A budget is a key to a business’s success. When preparing a budget, you have to estimate your level of activities for the coming periods. This is why you need to take into consideration what you’re likely to earn and your forecast expenses during the budget period.
A budget does not have to be complicated, however, the more detailed and realistic it is, the easier it will be to manage and the more efficient it will be.
A budget is best prepared with the assistance of key individuals with financial responsibilities in the organization to ensure it provides a realistic view of your organization’s operations. Additionally, if they are involved in the budget preparation, they will be more engaged in ensuring it is respected.
Three factors must be taken into consideration when preparing a budget:
- The statement of earnings included in the financial statements;
- The receipts cycle;
- The disbursements cycle.
For example: Every month, I bill Company X $10,000.
In the statement of earnings, $10,000 will be entered each month.
The receipt cycle is different; Company X pays me within 30 or 60 days of the bill date.
Consequently, the $10,000 I bill Company X in January will only be collected in February or March.
The same applies to expenses. Generally, there are more types of an expense than types of income. Therefore, it’s important to take into consideration a disbursement cycle that varies according to all these types of expenses. Understanding this concept is critical, as it can impact the cash budget created.
Once you’re comfortable with your budget, you need to compare it with actual receipts and disbursements from month to month to ensure you’re still aligned with your objectives.
Efficiently using your budget means you review and adjust it often. The budget should be examined each month by the team to take the pulse of operations and analyze variances. Any variance should be investigated and the underlying reasons determined so that operations and/or the budget can be adjusted accordingly.
For example, you need to analyze the reasons for a shortfall or for particularly high sales, to see if your targets were too high or too low. The analysis will help you in preparing the next budget more accurately.
Using an up-to-date budget provides greater flexibility and supports cash resource management to determine what objectives should be set when establishing the next budget.
What are the takeaways?
The budget is an invaluable tool to plan, compare activity levels, manage cash resources and ensure your organization’s longevity. It will serve as a reference for all your important decisions. It’s a tool that must be prepared and revisited on a regular basis.
There are three important concepts to remember when preparing and using a budget:
- Plan activity levels for the coming period;
- Compare the budget with actual results from month to month;
- Understand variances and adjust the budget and/or operations.
At Operio, our business consultants understand the numbers and can help you attain your objectives. We can guide you with the budget preparation process and serve as a sounding board for your assumptions to ensure that they reflect your organization’s situation so that you have better tools on hand. Benefit from a free consultation by one of our dedicated advisors, click here to fill out the form.