By Steve Julal
As one year winds down and another revs up, among the most important things to do is to line up the elements of your business budget. If any of the items are askew, it could diminish the value of the time you put into the budgeting process and weaken the effectiveness of the budget itself.
Examine the Past Year
A good place to start is to look at the company performance for 2013. Analyzing the company’s current environment also will provide information and insight which is helpful in predicting what 2014 will be like. Specifically, by looking at the leading indicators and major drivers of business in 2013, it is possible to identify the key variables the business depends on. It is also useful to examine external factors as well.
Start with the Numbers
There are three primary components to developing the budgets for 2014:
- Income Statement
- Cash Flow Statement
- Balance Sheet
Begin with the Income Statement; here you will see information on revenue, operating expenses, and profit or losses. The specific factor to consider is how a company can increase profits and decrease expenses, and how this will impact the workforce, product lines and other costs.
The second primary budgetary component is the Cash Flow Statement. It shows you where cash is coming from in terms of daily operations, as well as external financing and investment sources. The statement also tells you where cash is going, as you finance business activities and investments. Even profitable companies can struggle if their cash flow is weak. Where do they go wrong? Under or unbudgeted asset purchases can have a major negative budget impact.
The last primary component of business budgets is the Balance Sheet. Here you will find your company’s assets, liabilities and owner’s equity within the given period. Your Balance Sheet should give you a good general impression of where your company stands financially. Take a close look at how your liabilities compare with assets. If your debts are mounting, a good objective for 2014 might be cutting discretionary expenses (such as business or travel costs) or developing a refinancing plan.
Identifying Key Budgeting Participants.
The next step in developing a budgeting process is to identify the key budgeting participants. Delineating the key participants largely depends on the budgeting guidelines. The structure of the budget, whether created chiefly at the executive level or at the department level, will determine what individuals need to be involved in the process. Finding the key participants also depends on the structure of a company, the number of executives, the number of department heads and the number of departments.
A related step in identifying key budgeting participants is education. Individuals that are involved in the budgeting process need to understand their role, understand the goal of the process, and be familiar with certain budgeting terminology. Key participants need to be identified so they can participate in the process, yet getting these individuals to contribute to the best of their ability is easiest when everyone understands certain basic information. If the budget process involves participants from all departments, it is likely that some participants will not have prior knowledge about finance and budgeting. Educating these individuals on budgeting procedures, as well as their role, will likely make the budgeting process go smoothly.
Why Your Business Needs a Budget
A budget will help you figure out how much money you have, how much money you need to spend, and how much money you need to bring in to meet your business goals. Bankers and other financiers may want to see a budget when you ask for a loan. Budgets can also help to minimize risk to your business. According to the U.S. Small Business Administration, a budget can be used to indicate some of the following:
– Funds needed for labor and/or materials.
– Total start-up costs for a new business.
– Cost of operations.
– Revenues necessary to support the business.
– A realistic estimate of expected profits.
Developing a budget can be a kick off to a successful new year. Having good reporting tools, properly aligning the accounting system against the budget, and implementing corrective actions based on budget performance are all keys to having a successful year.