Budget planning for your business doesn’t automatically make you a successful entrepreneur. But you’re on the right path, if you conduct some financial forecasting.
Creating a budget allows you to accomplish business goals. A financial forecast is probably already on your mind most of the time, but it helps to see it in black and white. Recording the details and turning them into a cohesive plan will give you a reliable strategy to implement. The budget helps you anticipate profitability of each of your products or services and gauge the impact of new decisions.
Elaborate projections are not required. You simply have to understand your business and apply some common sense. To begin, you must establish some basic bookkeeping elements. This is the foundation of your budget planning.
Cash vs. Accrual
Your first objective is to have financial information that accurately matches the timing of income and expenses. This may require accrual basis accounting. Accounting software like QuickBooks produces either accrual basis or cash basis reports. Accrual basis shows income when earned and expenses when incurred. Cash basis counts income when payment is received and records expenses only when they are paid.
With some businesses, cash and accrual are nearly identical. For example, when customers pay at the time of sale, cash basis revenue is the same as accrual basis revenue. Accrual accounting is a little more accurate at matching the timing of expenses to the income generated from incurring them. You may use cash basis for tax purposes, but use accrual basis for budgeting – especially if your type of business has significant lags between sales and receipt of payment and time gaps between receiving and paying bills.
Adjusting for Current Circumstances
Start your budget with categories and amounts that exactly match your historical income and expenses. Sales accounting must have distinct revenue accounts for each type of product or service. Also, your bookkeeper should separately classify the direct costs of each sales category.
Amend your budget to reflect new sales projections by category. Sometimes the best seller is the least profitable. So endeavor to sell more items with the highest profitability. Increase or decrease direct costs that change in relation to revenue adjustments. Finally, determine which general overhead expenses are higher or lower than you expected. Adjust your budget to curtail excessive expenses.
Adding New Actions
Add budget lines for new products or services you plan to introduce. For each of these, budget separate revenue and associated costs. Ask your bookkeeper to systematically account for these differential categories.
Increase budgeted spending for areas where you plan changes such as adding new employees or launching an advertising campaign. Maybe you need to pay for revising your website or improving your physical location.
As you write down objectives, you begin to prioritize which ones you can truly accomplish this year. This makes you focus on what’s most important and avoid being distracted by less-worthy tasks. Plus, you will find you can execute the plan to achieve these goals when you know they are affordable.