A budget is a financial plan that sets out, using figures, an organisation's expected costs, revenue and resources for a given period of time, usually a year. Small business owners may run their businesses in a relaxed way and may not see the need for a budget. However, if you are planning to still be in business in the future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.
Benefits of a Business Budget There are a number of benefits of drawing up a business budget, including being able to:Budgets are a valuable tool for evaluating the performance of a company at the end of the time period that the budget covers. Owners should look at actual expenses, for example, as compared to budgeted, or planned expenditures. By doing this, the owner can see how much actual expenses varied from planned expenses in order to improve the budgeting process in the next time period. The same is true for the revenue side of the equation. Owners want to see if planned revenue equaled actual revenue as this will help them plan revenue inputs for the future.
To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully. The three key drivers for most businesses are:
Budgeting forms the baseline for a company's future performance. Managers create the budget anticipating financial conditions and market expectations for future periods. These managers calculate revenues and expenses for the period being budgeted. When the period reflected in the budget arrives, the managers compare actual expenses to the budget numbers and evaluate the department's performance.
Create BudgetCreating a company budget involves every department within the organization. The sales department anticipates market conditions and estimates future revenues to create a sales budget. The production department uses this information to create a production budget anticipating material, labour and overhead costs. Administrative and selling managers anticipate their expenses for the upcoming year. A budget manager coordinates the communication between each department and compiles each section into a master budget and creates budgeted financial reports.
Measure Actual ResultsThe accounting department records monthly transactions in the general ledger. The accountant creates regular financial statements to communicate the financial results for the company. The accountant also creates financial reports which communicate sales activity and department expenses for individual departments. The accountant distributes the department reports to the appropriate department managers and the complete set to the budget manager.
Calculate Budget VarianceThe budget manager compares the actual sales and expenses to the budgeted sales and expenses. The difference between the actual and budgeted amounts equals the budget variance. The budget manager combines the actual numbers, the budget numbers and the budget variance numbers on one report for each department. The budget manager distributes this report to the department managers and their superiors.
Evaluate PerformanceBudget variances are used to evaluate the performance of individual department managers. The larger the variance, the more questions superiors ask regarding the amounts. The department managers must explain the reason for the budget variance. If the budget manager has a reasonable explanation or the situation was out of their control, their performance is not adversely affected. If the budget variance exists due to mismanagement by the department manager, the manager's evaluation will be negative.
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