Everybody knows what budgeting is – you just figure out where you are going to spend the money you earn, and that’s all there is to it – right? Well yes and no. Yes, going through the budget process does identify how you are going to spend the money you earn in the short term. It is a tool you use from day to day and from month to month. But it is a wasted effort if it is not also focused on the longer term and achieving your strategic objective – the vision of your business as it will be when it is fully developed.
Your strategic objective is a clear written statement, a detailed picture of the future of what your business will look like, act like, and how it will perform when it is fully developed. It is a commitment to the future, not just a wish.
The idea, then, is to establish the pattern of profits and sales that will get you to your strategic objective in the time frame you have set, and create a budget to make it happen. It’s a matter of plotting the annual progress you intend to achieve, and breaking those annual goals into a progression of monthly results.
Budgeting is one of those core business practices that every well-run business uses and is a crucial aspect of financial planning. It’s a fundamental management tool that not only keeps you and your people on course, but provides the radar to tell you when you’re off course and how far off course you are. Whether you are a beginner or a veteran at budgeting, it pays to review the basics. Here is an overview of the main activities of the budgeting process.
Budget Setup
The first step is to outline the ground rules you will follow to prepare your budget. What is the layout and formatting of the budget itself – will you build your budget on a monthly, quarterly or annual basis? Who will be accountable for generating the numbers and producing budget documents? How the review process will work – what reports will you need to compare actual results to budget and on what frequency?
Plan and Forecast
The budgeting cycle begins by doing the planning and forecasting that will shape your business in the months to come based upon your strategic objective or goals. Fortunately, most goals have a dollar amount attached to them and the basis from which you can create your budget – revenues and profits. And of the two, profits are the more important because profits are the key to the long-term financial value of your business.
The idea, then, is to establish the patterns of profits and sales that will get you to your strategic objective in the time frame you have set, and create a budget to make it happen. One way to create your budget is to base it on sales (revenue) forecasts and work through the line items to net profit. If that profit meets your goals, you’re set; if not, you can review the various line items to see where you can make adjustments to meet the profit goal. The better way is to start your profit goal and calculate the revenue you have to generate in order to achieve the required profits.
Chances are the initial budget you set won’t be perfect. Update your forecast quarterly or when new information or events impacts your company. Compare initial plans (budget) to what actually occurred (actual), and adjust remaining budget figures accordingly (forecast). By doing so, your budget will keep touch with reality and provide you useful information as part of your monthly, ongoing review.
Monitor and Report
Use your accounting system to gather and organize actual results, and create monthly budget variance reports that point out where actual results differ from your plan and how much they differ by. Then do some research as to what is causing the favorable or unfavorable variance. This information is the key to help you make the right decisions to move your company forward towards your strategic objective.
Review and Manage
Budgeting is where planning and implementation meet. Managing your budget is translating information into action. Your budget tells you what you need to accomplish. Your variance reports tell you what you are actually accomplishing. Your budget review process gives you the specific direction you need to focus your attention where it will do the most good, where it will get the best results for your business.
Study your budget and variance reports for clues on how to improve your business, spot problems before they become serious and generally “keep in touch” with the pulse of your business. Use this opportunity to review and confirm budget assumptions and revise them, as necessary. The point is, your budget gives you a “standard” to work for as derived from your strategic objective, your variance report shows you where you are in relation to that standard, and your review and analysis process helps you ask the right questions to ensure you get back on course.
As you refine your budgeting skills, fine tune your budget numbers, and become more imaginative in your review and analysis of your variance reports, all this will become second nature. You’ll scan the monthly variance reports, instantly honing in on the things that matter. You’ll have a firm grasp on the leverage points of your business. You’ll see problems long before they become serious, and opportunities will become visible at an early stage when you can maximize their benefit to you and achieving your strategic objective.
© 2009 Linda A. Hunt. Reprint rights granted to all online venues so long as it remains complete and unaltered (including the “about the author” info at the end). Send a courtesy copy of the reprint to info@lahenterprises.com.
Linda Hunt delivers simple, practical strategies for creating systems and structure that create stability helping business owners to grow their business and earn more money. For more FREE tips like these, visit her at http://www.sumsolutions.com
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