Successful entrepreneurs know that financial forecasts are crucial for a business of any size. The long shadow of failure awaits the enterprise that has not properly budgeted for upcoming circumstances.
When presented with the task of budgeting, many people react as if they’ve been asked to tackle a grizzly bear. But those who let reason win out over fear soon see that a budget is a tool they’re acquiring, not a burden they’re enduring.
Using weak budgeting techniques may get the job done quickly, but doesn’t really deliver any value. For example, it’s best not to waste time creating a budget that simply takes actual numbers from last year, then adds a fixed percentage adjustment and a few guesses to certain spending categories. Instead, your budget should establish the actual spending necessary to operate at peak output; remember, you can always reduce it in the future if sales don’t sustain it.
Guessing about spending doesn’t produce enough information for planning in an efficient way, and the result is cash management problems. Knowing how much your business can afford to spend is a real necessity.
You can establish a sound budget, and assess your actual spending, by calculating the cost of each type of item in the quantity required to sustain revenue. These details then flow into a master budget where the broken-out expenditures are combined into summary categories.
If your business has only a few types of expenditures, that should make your budgeting task simple, but don’t make the mistake of going directly to the summary figures and missing the necessary interim step of figuring out the per-item costs.
Even if your business is entirely service oriented – with no purchases of inventory or parts – some of your spending still fluctuates according to sales. Among the possibilities: ever – changing costs for travel or supplies.
A budget that aligns with expectations identifies how much you must spend – and when – to achieve your sales goal.
Accurate budgeting allows you to understand where the money is going. For instance, should you need to reduce expenditures when revenue falls short of the goal, the budget presents breakdown line items to show you what items you can do without. Likewise, if you intentionally spend less on a single item, accurate budgeting quantifies the result of your action, showing you the commensurate reduction in sales revenue.
The master budget summarizes each expense line item. You don’t identify adjustments in these main categories; this summary gives you an overall picture of what to expect each month for the upcoming year, offering you a cohesive perspective on outlays of funds per month.
You can certainly tackle a budget yourself; however, another method is to get started with some professional help. These two methods aren’t mutually exclusive – once the budget spreadsheet is put together, updating it as ongoing events unfold is easy. Change one number in the line – item breakdown and the master figures are instantly updated.
The result: you stay informed and prepared throughout the year by letting the numbers do the talking.