Businesses can attain financial sustainability and grow at a healthy rate. Budgeting must be done beforehand to plan for expected future revenues and expenses. With budget planning, businesses must document all the functional domains of the operation. Plan business finances and make optimum use of the financial resources at your disposal. Then you will gain maximum profit, efficiency, and sustainability.
How to Manage Finances Effectively
The goal of this 2-part article is to walk business managers through the process of:
- Creating the operational budget
- Comparing the actual financial numbers with the budget plan as they occur
- Making financial decisions to keep variances between the budget and actuals to a minimum
To start with, we will focus on the budgeting process and how to create a Profit and Loss budget. This helps businesses manage finances efficiently.
An operational budget sets expectations for revenues and expenses in future periods. Budgets are one of the most important business financial statements. Proper budget planning allows managers to monitor the financial impact of the business decisions and operational plans. Follow a set schedule when preparing a budget. This way, the completed budget can be used by the beginning of the next fiscal year.
The profit and loss budget or P&L is a summary of expected income and expenses, typically for the entire year (referred to as the fiscal year). Compare the actual income and expense information to the expected business operating plans for the budget period. Mangers must measure business outcomes against the prepared budget in order to track achievement of planned goals and profits.
Start by understanding your business goals and involve key staff in the planning process. This ensures your budget is aligned to your goals. The appropriate people involved in the day to day operation prepare and review it.
Every business owner tends to have a slightly different process, situation, or way of budgeting. However, nearly every budget has parameters that you can easily employ. For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, the cost of goods sold expenses (raw materials), interest and tax payments. Every business owner should consider costs specifically associated with the business when setting up or taking over an existing business.
With a business that is already up and running, future revenue assumptions are based on recent trends. If the business is a startup, assumptions are based on geographic area, hours of operation and researching other local businesses. Small business owners can often get a sense of what to expect. They can research other local businesses for sale and get information about revenue and traffic patterns. After this, match revenue with expense budget. The goal is to figure out what an average expense for overhead, utilities, labor, raw materials, etc. would look like. Based on this information, business owners may estimate or forecast whether they’ll have enough money to expand their business or to save.
Basic steps to the Budgeting Process:
Follow these steps to help you plan your business budget:
Check Industry Standards
Not all businesses are alike, but there are similarities. Therefore, do some homework and find information about the industry and speak with local business owners. The cost groupings will allocate the revenue percentage. Small businesses may be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors. So you only need to look for an average here, not specifics.
Prepare a Spreadsheet
Prior to buying or opening a business, construct a spreadsheet to estimate what total amount and percentage of your revenue to allocate toward raw materials and other costs. It’s a good idea to contact any suppliers you’d have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc.
Factor in Some Slack
Business estimates will generate a certain rate of revenue growth going forward as well as fixed or controlled expenses. However, the estimates are not set in stone. Because of this, factor in some slack and make sure there is more than enough money set aside or coming in before expanding the business.
Try to Cut Costs
Consider cost cutting when times are tough. It is appropriate to procure money to pay a crucial bill, advertise, or otherwise capitalize on an opportunity. Begin by looking at larger controllable items. Another tip is to wait to make purchases until the start of a new billing cycle. You can also take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide business owners with much-needed breathing and expansion room.
Review the Business Periodically
While many firms draft a yearly budget, small business owners should do this more often. In fact, many small business owners find themselves planning just a month or two ahead. This is because business can be quite unpredictable. Unexpected expenses throw off revenue assumptions. Budgeting is an essential process used to forecast and compare revenue with expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid financial future.
I have sourced my information from:
- accountingtools.com › Accounting Procedures
- nonprofitaccountingbasics.org › … › Budgeting and Financial Planning
- www.business.vic.gov.au › … › Developing good financial procedures