Here we are… midway through the final quarter of 2015. It’s been one of those years that many will state was not as strong as the previous year. So, with that being said, it’s a good time to assess your company’s financial position and prepare a business budget for 2016.
Why are budgets important? Business owners know careful planning and constant review of their financial position leads to better things. Most companies use some form of accounting to identify, measure and analyze performance history. Of all accounting tools which include budgeting, financial statements, forecasts and comparisons, budgets may be the single most important tool a business owner uses.
Facts – Budgets present a detailed statement of how a company plans to spend money during a future time period. Whenever expenditures are accurately forecast, it becomes apparent how much income needs to be generated to provide operating profit to cover those expenses. Budgets also determine how much time may be allocated to specific projects by way of expense limitations. Large corporations have the luxury of being able to pay accounting firms to prepare their budgets. Such is not the case for the small business owner. Hence, the need of the small business owner to understand what it takes to prepare a budget is critical.
Roadmaps and Timelines – a financial budget allows the company to have a financial roadmap with definitive time parameters. However, budgets are guidelines. They are important inhibitors to unnecessary expenditures and provide the team a visual figure in dollar terms within which they can spend money. Variances to the budget may be negative yet some may be positive. Positive variances in unexpected sales growth will require a change in the budget as it relates to expenditures required to support that positive variance.
Future Planning - a budget may often be used to plan for growth and expansion. Allocation of specific capital for upcoming projects is often planned months, if not years, in advance. This allocation comes from prior budgets in a manner that reserves capital (from after tax earnings) for use at a later date. Reserving capital also may be used for the purpose of enduring a slow economic down turn.
For the small business, preparing a budget that includes the basics…..most likely case revenue, conservative estimates of cost of sales and variable expenses, payroll, financing costs based on expected debt, miscellaneous expenses that may or may not arise and income tax expense….does not take much time.
If you use the services of a factoring company, financing costs are easy to predict, especially if your discount fees on invoices are a fixed percentage of sales. One benefit to having a factoring relationship is that, as your sales increase, your credit needs will more than likely be met because your factoring company has already agreed, in advance fund your growth.
Now is a great time to finalize your budget for the upcoming year. Meet with your partners and managers and outline the best case, worst case and most likely case scenarios for the next year. The most likely case scenario is probably going to be your base line. Preparing monthly twelve month budget is the way to go. You can then review your progress on a monthly basis and manage immediate goals based on performance utilizing real time numbers. The beautiful thing about a budget is it can be adjusted periodically when things are going well. At the end of the fiscal year, compare actual numbers to the original budget and assess your accuracy. Finishing a year with pretax income above the budget is a great feeling and presents management with an opportunity to financially reward employees for a job well done.
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