How does your business keep track of money in versus money out? The budgeting process is vital when it comes to controlling financial situations.
If you do not currently have a monitoring process, I promise this exercise will be quite enlightening.
What is budget and why it is so important? A budget is a quantified plan of action that allocates financial, human and physical resources over a given period of time to attain specified goals.
Static budgeting models are one of the most common forms of business budgeting. A static budget is a fixed amount that covers the entire budget period. This type of budget is most useful when a business has a good idea of company sales and expenses and are not expected to change much. Subsequently, if the actual sales numbers and expenses do drastically change, the budget in fact stays the way it is.
Zero-based budgeting (ZBB) is a budgeting technique that starts at a base of zero, referencing none of the prior year's budget or performance.
This concept is essentially building a business budget from the ground up. The goal of zero-based budgeting is to analyze all expenditures and allocate money into processes that will provide the greatest return on investment. It requires a lot of time and effort, but can be extremely beneficial if done right.
Incremental budgeting is a traditional budgeting technique that begins by analyzing the budget from the last period. Only incremental amounts are added to the previous budget to arrive at the new budget. Management assumes that all business departments will spend relatively the same amount as the previous year. Any additional cost increases are due to inflation and new business costs.
A flexible budget is a budget that adjusts due to business activity. This technique takes estimated revenues and expenses based on the current year as a base to project how the revenue and expenses will change.
A “what if” scenario can easily map out best and worst-case scenarios for the future of a business. Additionally, flexible budgeting techniques can be used to evaluate the successful and unsuccessful areas of performance and then reevaluate for the next year.
Creating a Business Budget
Now that you're familiar with a few of the most commonly use budgeting techniques, it's time to plan. Here are three quick and steps for planning a business budget.
Analyze Your Revenue Sources
The first step of any business budget is to analyze how much revenue you bring in on a monthly basis along with where the revenue comes from. Remember to include all income sources in an easy to manage list format.
Determine Your Costs (Fixed, Variable and One-Time Spends)
- Fixed costs are any expenses that cost the same each month.
- Variable costs vary month by month.
- One-time spends are purchases that are infrequent.
Start by making a list of all your costs and categorize them based on initiative. Include a column for the type of cost, as well.
Review Your Budget
You must keep track of your business income and expenses if you want to gain the most out of your spending plan. Analyze your budget on a regular basis and make necessary adjustments to ensure costs never exceed revenue.
The Bottom Line
Creating an accurate and realistic budget not only encourages long-term business goals but will give you great insight to everyday finances. Business budgets will assist in making knowledgeable budget allocations that will drive goal achievements. It makes it easier to predict profitability – and costs. What else stands in your way of a balanced business budget? Are there any hurdles that currently have you paralyzed in the process? Contact us today for a full budget evaluation.