THE “B” Word…Budgeting

The Why’s and How’s of a Financial Plan,

ie: THE “B” Word…Budgeting.

First let’s define the “B” word. A budget is a plan, an estimate, and often a guestimate of revenue (income) and expenses. Without deliberate forethought and planning no business can achieve it’s potential. Whether the company is a fortune 500, independent/franchise for profit, or a not for profit business the budget IS the roadmap for success.

Why?

The budget will determine whether a company has enough money to; fund the basic operations, expand the business, or generate income for the owner. The budget also identifies weakness before they become devastating to the longevity of the business. Factors such as overspending when the income is not present, determining areas of necessary growth, and identifying if enough money and where it is being spent to grow the company is effective and efficient will be controlled with a detailed budget.

How?

The large independent or franchise companies likely have their own computer software that details actual income and expenses based on their industry standard and individual needs. In other words the leg work has already been done for these companies. The new and/small business owner must invest in software such as QuickBooks or Peachtree that will guide you through the budgeting process. The “process” is what these programs will guide you through; however the value of the answers provided will be dictated by the thoroughness of the information input into the software. To guide you through making the most out of your financial software simply follow these six steps:

• Research industry standards. Although your business is unique there are industry standards that you can model and improve your business practices based on the roads they’ve traveled. The local library, local government offices, other business owners in and out of the industry, and the IRS can be helpful in predicting cost percentages based on generated income.

• Prepare a spreadsheet. Before you begin working with your software generate your own spreadsheet that will guide your questions you need to research as well as set your fixed costs such as rent, utilities, taxes, insurance, cost of goods etc.

• Allow wiggle room. Expect the unexpected is the catch phase that is never more relevant than in budgeting. Plan for almost everything to cost more and for revenue to trickle rather than steadily flow. Utilize your research to aid your decision as to the amount of wiggle room you should allow. As a suggestion most accountants would advise a minimum of 10% and as much as 20-25% wiggle room when budgeting to give you room to breath.

• Cutting Costs. Cutting costs is often the most controllable factor when faced with an unexpected growth opportunity, slow periods, an unexpected expense, or to pay for that crucial bill. Delaying a purchase or utilizing or establishing terms with suppliers are a couple of options that can typically help you cut your costs.

• Establish a process for financial review. Often a budget is established annually with frequent actual vs. projected analysis. An annual budget is still a useful tool, but with the volatility of a small business budgeting should occur much more frequently based on real numbers and new projections. Small and large companies benefit from consistently developing 30, 60, and 90-day projections.

• Comparison shop. This has a double meaning in the budgeting process. First of all competitors should be comparatively shopped in order to determine whether your prices are providing the value YOUR customers will pay for based on what they pay your competitors. Secondly, you should regularly compare the prices your vendors are charging. Extra care should be taken before changing vendors to ensure quality and service will not be compromised, however this is one way costs can be managed.

Following these six steps and investing in accounting software will get you headed down the right path of financial success. If you would like support building YOUR Budget Process we are we are eager to team together with you to get the results you desire. Visit our website at www.themeritgroupindy.com or call 317-805-4896 today!

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