Start Planning Next Year’s Business Budget Now

Successful business owners start planning their annual budget early. In fact, now is the time to start. But relax: It can be a simple task. And when the planning process is wisely handled, the benefits of budgeting will far outweigh the cost of time spent preparing it.

Budgets should not be time-wasting exercises without staying power. To create a useful budget that will stand up through the following year, you shouldn’t be spending much time jotting down figures on a page; it’s clear thinking that will produce a strong financial model.

Budget according to business type

A budget should be as simple as the business type it embodies. A one-person operation, for instance, will probably have a basic budget that easily adjusts to rapidly changing conditions. A store or company with several employees generally requires a more refined budget. But take note: Detail is not the aim. Your objective is a useful plan.

A business budget is more than numbers on a spreadsheet. Instead, budgeting is a thought-provoking process. By creating a budget, you’re quantifying your expectations for the future. The process forces you to predict what’s likely to happen as a result of your intended actions. And with a budget, you also calculate the predicted impact of industry trends, demographic changes, and general economic conditions.

Build in flexibility

The simpler your budget, the easier it will be to compare with actual results. And you can always alter the budget for changing circumstances.

Budget planning begins with differentiating fixed and variable costs. Some business costs are fixed monthly amounts, but many other costs are dependent on the revenue you bring in.

When expected revenue changes as actual results unfold, it should be easy to revise the upcoming variable expenses as percentages of sales. Costs directly related to sales volume are either moved forward or scaled back, depending on the way the revenue is going.

With both fixed and variable expenses considered, your other concern is major nonrecurring expenditures. Your budget should give you confidence that spending plans are reasonable based on cash flow. If the budget shows available liquidity, you can plan for major expenditures. As the year unfolds with better- or worse-than-expected results, you can shift these expenditures to occur either sooner or later according to the level of importance you assigned to them.

Think before quantifying

Budgets ultimately save money because they compel you to prioritize. Adjustments to your budget assumptions depend on the thinking you did before you actually began quantifying anything. Although expenses are a certainty in business, cash is a limited resource. Budgeting identifies how much money to allocate for each category of expenditure and tells you when you can afford nonrecurring cash outlays for important but revenue-sensitive items, such as training, new equipment, staff additions, or a special marketing campaign.

Because budgeting entails as much thinking as calculating, it’s a wise move for all business operators to begin the mental portion of the process well before the year-end…like now!

Asset Trades Can Pose Accounting Challenges

What is an asset trade? Well, like trading in your older vehicle for a newer model, an asset trade occurs when a business owner wants to trade up to improved technology and a vendor offers trade-in value for the older equipment.

This can pose an accounting challenge. The main issue with asset exchanges is that they differ fundamentally from ordinary business income. Savvy business owners will want professional accounting advice to properly record these transactions in their companies’ books.

In a cash sale, the gain or loss is the difference between the book value and the money received. When you receive more cash than the book value, it’s a gain; when you receive less, it’s a loss.

In an asset exchange, the relinquished asset has a carrying value on the company’s books, typically its original cost less allowed depreciation calculated up to the exchange date. The gain or loss is the fair value of the received item minus the book value of the relinquished item.

This is the case only when it is a nonmonetary exchange for dissimilar assets, such as trading furniture for computer equipment. When assets are similar, as is the case for most trade-in events, no gain is recognized from the trade.

In these instances, the gain simply reduces the fair value of the received property. The new asset’s book value is equal to the relinquished item’s book value, plus additional cash spent. Gain is not realized until a future date when the received asset is disposed of for cash or dissimilar property.