Set a Thorough, Realistic Budget for Your Business
By DEBRA KAYLOR, CPA
You may have heard a lot about the budget for the Commonwealth of Massachusetts this summer and how we, the taxpayers, were going to help balance that budget through new taxes. But what about your budget?
Budgets are a necessary tool to help you monitor where you are and what changes you may need to make to address any unforeseen situations on a timely basis. Many are still recovering from the recession, and while the thought of having to prepare a budget seems frightening to many, it’s a useful and necessary tool to help you and your business make it through any economy — good or bad.
Budgeting helps measure your performance by being able to review what you expected to happen as opposed to what actually happened, and analyze why those differences occurred. Depending on the size of your business, budgeting might be done semi-annually, quarterly, monthly, or even weekly. It relies on assumptions and expectations for the future. As such, you need the right data to build these assumptions and expectations.
There are many questions to ask yourself and others — where do we think revenues will be, what new customers do we think we will gain (or conversely lose), what is the expected cost of our supplies, what new projects do we need or want to do, how many employees do we need, and what will happen with our insurance rates? While no one has a crystal ball, working with other departments in your organization as well as colleagues in your industry will allow you to build a realistic vision of what is expected to happen.
Here are a few things to consider:
• Know what you can control and what you can’t control. Some industries are fairly straightforward, and revenues (and related expenses) can be easily predicted. However, most are not and are subject to variables that are market- or economy-driven and cannot be controlled. Start with what you know, and then step back to review the variable factors and how your business will (or can) react to significant changes in those factors.
• Be realistic. If you expect revenues to decrease, set your budget that way. Do not set yourself up for failure. Budgets are there to help you, not hurt you. Don’t make your budget a target of where you’d like to be, but rather a tool to monitor your progress toward your strategic goals.
• Be careful not to get too specific. This may divert your efforts too much to gathering the data instead of effectively using it.
• Consider seasonal changes in your business when preparing quarterly or monthly budgets. Is most of your revenue generated in the summer? Prepare your budget that way so you can better analyze your budget versus actual results and why actual results may or may not meet the budget.
• Allow plenty of time before the year begins to prepare the budget. Typically, the process isn’t easy, and a lot of information must be gathered prior to pulling it all together. This will also give you an opportunity to consider other actions that may be necessary to meet certain goals — i.e. do you need additional financing, or do you need to reconsider your insurance package? The budget should also be approved by management or a board of directors and discussed with those responsible for monitoring their areas.
• See if your accounting software can help develop and monitor your budget. Many software packages do allow you to enter your budget on an annual and/or monthly basis and may be able to help pull the historical data you may want. This will eliminate the time and potential errors of manually entering information into an Excel spreadsheet.
• Monitor the budget in a timely and consistent manner. This allows you not only to measure your performance, but also to hold people accountable for their areas and reward those who do well. Yes, there are always unknowns, and sometimes things happen that are not in the budget. But that’s OK. One common mistake of monitoring is expecting actual results to mirror the budgeted amounts. While some line items are typically easy to predict (like rent expense, which usually does not change month to month if there is a signed lease agreement in place), most are not, and variances are expected. Monitoring on a timely basis will allow you to identify the factor that kept you from meeting your budget. Successful monitoring will also enable you to adjust other areas as necessary for the larger variances in a timely fashion.
• Learn from your mistakes, especially if you haven’t used budgeting as a tool in the past. In addition to helping you monitor how your business performed monetarily, budgeting should teach you something about your customers and your vendors. What is happening with them will affect you both in the short and long term.
While budgeting is often thought of a tool for businesses, it is also effective for your personal finances. Do you want to take a vacation this year? Do you need a new car? How much money will you need? The same principles apply and will allow you to do the things you would like to do and be prepared to react to unexpected events.
Now that you have your budget, keep up the good work. Budgeting is not a one-time event. To be successful, it must be monitored on a consistent basis to help you succeed with all of your goals. If you monitor and review your budget on a timely basis, you will be better prepared for the unexpected as well as preparing for the future.
Debra Kaylor, CPA is an audit and accounting senior manager at the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3515; [email protected]