A budget is a financial and operational plan that outlines the goals of a business. It helps the business run efficiently with minimum wastage of resources and also helps evaluate the performance of the business. A budget is made even before a company’s business is commenced and then once it is established, budgets are made quarterly, semi-annually or annually. The main things listed in an annual budget are an organization’s fixed and variable costs which help in allocating the funds and capital efficiently, as per the business plan and the goals. One example could be the cash budget of a company reflecting it’s future cash inflows and outflows and helps in managing the liquidity better in the following financial year.
Key tips to follow while budgeting
Knowing what an important role budgeting plays in the performance of your business, in this article, we will discuss how to make annual budgeting a piece of cake for your firm.
- Budgeting team: One of the best budgeting tips out there is to have a budgeting team that knows the organization in and out, thoroughly. The team should know the business structure, the structure of the industry the business operates in, the laws and regulations of the industry and how the market works. They should be able to bring their own ideas to the table while keeping in mind all the things mentioned. Their perspective should align with the business goals and every member of the team should have the same objectives.
- Realistic budget:The budget should be realistic and attainable;there’s no point in having an unrealistic budget that is nowhere close to the actual results. A budget should be prepared after extensive research and should be based on the past results and the future projections. Future expectations should be minimal but enough to make an annual budget. A key tip would be to overestimate the expenses and underestimate the incomes and revenue while preparing the budget, so it stays realistic.
- Flexibility: Keeping in mind the risks involved in a particular business that’s operating in a particular industry, the budget should be flexible enough. Risks like the regulations on minimum wage or insurances or taxes changing should be kept in mind while making a budget. Other risks like political instability or natural disasters occurring are important to assess too. Once made aware of such risks, the budget should be prepared and some savings should be kept aside for such emergency situations. If the budget is flexible, it can be altered multiple times throughout the year.
- Revisiting: It’s essential to revisit the budget multiple times during the year rather than just comparing the actual results one time at the end of the year. If the comparisons are being done throughout the year, it’ll be easier to fix things. By revisiting the budget multiple times, you can change your spending decisions and change your expenses according to the income/revenue being generated.
- Keeping track of sales: It is also very important to keep track of your sales cycle. Depending on the nature of the business, it is important to know when there is an off-cycle during a period. During off-cycles of sales, fewer expenses should be made too. Knowing that will make it easier to make a much flexible budget.
- Saving money – the wise choice: Saving and overestimating expenses, as mentioned before, is very important for budgeting. Some businesses, during periods of increased sales, start splurging and save less. If you won’t save during on-seasons, expenses will increase during off-seasons and the budget constraints would become harder. Similarly, before making a large purchase during periods of high revenues, it’s important to look at the budget plans and the future projections and risks involved. A regularly updated budget and careful assessments of risks will help in making these financial decisions.
It’s essential for the managers to be transparent with the stakeholders, especially employees, about the budget so they are aware too. Not only is it important to present the budget to the stakeholders but can also be used as an important tool. Using these tips in the right manner for preparing a close-to-actual budget will impact your business in all the right ways.