Another Year--Let the Budget Roll!
Budgets are a tool for long-range planning and should be well prepared and carefully managed. Budgeting is like goal setting. Once you commit it to paper, you have a better chance of achieving your desired results.
As we approach year-end, it's time again to make sure you have your financial budget in place. Many businesses only prepare a budget when a banker asks to see it. However, most successful companies spend a significant amount of time and resources developing their budget. It's important to keep in mind the difference between a budget and a forecast. A budget is what the business wants to achieve in terms of planned outcome, whereas a forecast is more along the lines of a prediction of the future. Generally your budget should cover at least a one-year period which is generally the fiscal year of the business. With computers, you can easily have your normal annual budget as well as a rolling 12-month budget. A rolling 12-month budget covers the next 12 months, no matter what month it is. For example, in November your rolling 12-month budget would cover November 2003 through October 2004.
WHY?
Budgeting can help you foresee problems before they occur. Your budget gives you an opportunity to alter your plans if you see problems looming. Your budget is your tool to help you plan your business, for example, when you need to hire, when you need to fire, when you need to purchase inventory, and when you need to make capital improvements.
HOW?
Build your budget from the bottom up. That means the first step is to determine the bottom line your desired profit. While many start their budgets focusing on the revenue with the bottom line being what is left over, this approach starts with your desired outcome. The second step is to determine your operating expenses. Analyzing your previous expenses can form the basis for your budgeted expenses. Software programs even as simple as Quicken have automatic budget features allowing you to start your budget with historical data. However, be aware of planned changes, such as increased rent if you plan to move to a new location. Also, examine each expense category to determine if the amount is both necessary and reasonable. For example, now that many documents are being electronically stored, you may have increased technology costs and decreased paper and storage costs. Many companies that budget spend the majority of their time budgeting expenses. Remember that this is only one step of the budgeting process. The third step is to calculate your gross profit margin. Your gross profit margin is your revenue less your cost of goods sold. However, since you are building your budget from the bottom up, another way to calculate this is to take your bottom line profit and add your budgeted operating expenses. The fourth step is to estimate your revenues and calculate your cost of goods sold. The cost of goods sold is driven by your revenues. Thus, this step requires estimating your sales. Based on your calculated gross profit margin, you will need to determine if your budgeted amounts are achievable. The last step is to make adjustments. Building from the bottom up helps keep you focused on the components of what is necessary to reach that bottom line goal.
WHEN?
As mentioned earlier, a rolling 12-month budget will help keep a full year ahead of you. Once you are in the habit of budgeting ahead, you'll find that you have a better handle on your business giving you the ability to adapt to rapidly changing conditions.
WHAT NEXT?
Analyze the differences between your budget and actual amounts. This should be a regular part of your business routine. Asking "Why" items are better or worse than your budget can help you see where you are off course and by how much. It also helps in adjusting your future budgeted amounts. Expanding your budget to include a cash flow statement helps pinpoint when additional funds may be needed or when you will have excess cash to invest. A cash flow statement converts your income and expenses to cash receipts and disbursements. Budgets are a tool for long-range planning and should be well prepared and carefully managed. However, don't hesitate to update your budget frequently when you determine changes are necessary. Budgeting is like goal setting. Once you commit it to paper, you have a better chance of achieving your desired results.
Julie A. Welch (Runtz), is the Director of Tax Services with Meara, King & Co. and co-author of 101 Tax Saving Ideas. She can be reached at 816.561.1400 or by her e-mail at julie@meara.com