If your business is like most other businesses, as the year winds down, your finance departments are preparing the budgets for next year and factoring in what’s likely to happen. You’ll need to use historical data and calculate projected income and costs, but what sets this budget apart from last year’s is the fact that trading conditions and tax law continue to change and evolve year after year, and most businesses will have to rethink the way they do business.
The annual budget process is a key part of running a business successfully and achieving your strategy, but your company’s 2013 budget, should be viewed as a living document and continuously reviewed in light of the current business environment and your company’s actual performance throughout the year.
Regular monthly or quarterly reviews provide the discipline for management to thoroughly examine accomplishments and realign tactics to achieve your objectives, for executives to commit to supporting the budget and investment plans, to grow the business organically or source outside funds for the coming fiscal year.
Without a plan, you could easily go out of business. How else can you be sure that you can maintain cash flow and profit so that you can cover all your expenses? Only a planned budget can give you a basis for control. Make sure your numbers are realistic, cover all the details and try to avoid mistakes… but when mistakes are made, learn from those mistakes. Factor in all the key elements that should be there for your particular business. Don’t make it too general, but don’t get stuck on requiring accurate figures. Refer to your 2013 budget often, noting differences in your income and expenses as the days go on.
No matter how small, businesses need to use budgeting and have a working business budget for good financial management. Entrepreneurs are usually so focused on business that managing finances becomes their Waterloo. You have to have a game plan for the business.
A working financial budget is necessary from the time an entrepreneur conceives an idea until that idea is put into operation. An entrepreneur can’t know if an idea is even realistic for a business without a working budget. For the small business owner, the working budget helps them assess the financial health of the company. The business owner can’t know where they are going or what potential opportunities or pitfalls lie ahead unless they have a budget. But is there a right way to put that critical budget plan together?
The 2013 Budget is your business plan for the coming year, so make sure your management is involved. After all they are the experts in your business. Make sure everything is time bound. Are you experiencing negative, flat, slow growth? Is the market shrinking, expanding, seasonal? What do you plan to achieve this year, and what has to be supported in order to achieve it? What’s the competition like? How are the key players and new entrants expected to affect your bottom line? Are there dynamic changes or new operational processes that redefine the business? Will you launch new initiatives?
Once business analysis is complete, top management must decide financial goals, which is what management will base their budgets on. Then the real numbers-crunching begins in earnest. The budget process needs a timetable and deadlines must be set to get the ball rolling. Often, managers create a traditional detailed plan based on previous years’ performance and project that into the coming year. They then intuit an aspirational budget that factors in the assumption of achieving their business goals. These two budgets should also include metrics and ratios that drive business growth, for example revenue per sales employee and profit per business unit.
Another way budgets can be prepared would be to project profit-and-loss following the format of financial statements. Businesses that operate on credit or extend credit should additionally prepare a cash-flow budget. It is critical to how much you’ll need – and when – to give management room to maneuver in finding new sources for capital.