Budget Planning Can Lead to Success

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.

Communicate With Your Bookkeeper to Avoid Problems

You don’t need to live in a barn to judge a livestock show, and you don’t need a formal accounting education to evaluate bookkeeping procedures. Many business owners rely entirely upon bookkeepers to accurately record financial transactions. That’s a mistake; you need regular communication with your bookkeeper to avoid problems.

Your normal bookkeeping process may entail recording all bank deposits as revenue. However, certain transactions should not be counted as revenue; the result will be inaccuracies and excessive income tax.

Often cash that isn’t revenue finds its way into your bank account: For example, you make short-term loans of personal funds to your business or deposit the proceeds from selling a business asset. In these circumstances, you need to alert your bookkeeper to prevent errors.

The most complex case of miscounted revenue arises in businesses that accept customer deposits – a common practice in many industries. These amounts are not revenue until the service is completed or the product delivered. Suppose you receive a $500 down payment to begin a $900 project in July. You complete the project in September and receive the additional $400. You should book the entire $900 as revenue in September; the $500 down payment should be tracked separately from revenue.

You must have a system to account for customer deposits and recognize previously received amounts as revenue once the work is finished. You need to communicate clearly and regularly with your bookkeeper to prevent this.