Most people run a business like someone moving around in the dark.
They neither look at and analyze past business records, nor plan for the future. The result is an inefficient business that rarely progresses into anything meaningful.
So what can you do?
Using a budget makes a big difference in business results
Budgets are great planning tools. They keep you focused and help you make important decisions regarding your business operations.
With the help of a budget, you can take your business to amazing levels, because you will have an idea of where your business is going, have sight of the needs of your business and plan how to fulfill them.
As an example, if you know how much cash you will have on hand any month, you will make careful spending decisions. If you know what payments are coming due in the next 3-6 months, you can plan the level of sales, revenue and external funding that will be required to meet those financial obligations.
Benefits of making regular budgets:
- Help you focus on what matters.
- Serve as a map for what you plan to achieve.
- Allow you to identify reasons for failures when you don’t achieve your goals and make necessary improvements.
- Let you have something to gauge your performance against instead of moving blindly.
Budgets should be made both monthly and yearly.
Different types of budgets
Businesses use different types of budgets for different goals.
One budget commonly used in business is the Operating Budget.
An operating budget forecasts the income and expenses of a business. It is similar to an income statement but more detailed. It includes items such as sales, sales volume, revenue, variable costs, and fixed costs.
An operating budget helps you plan the growth of your business.
Another type of budget is the cash budget.
A cash budget estimates cash flows of the business. It lists the planned cash inflows (revenue from customers, income from sale of equipment and investments, funding from investors and debtors, etc) and cash outflows (payment to employees and suppliers, payment to debtors, dividend payment to investors, payment for purchasing land or equipment, payment for repairs, etc.). A cash budget lets you know the cash needs of the business and plan for cash requirements.
AccountingTools says, “This budget is used to ascertain whether company operations and other activities will provide a sufficient amount of cash to meet projected cash requirements. If not, management must find additional funding sources.”
Projected and Actual Budgets
Budgets can also be projected or actual and you should use both for business financial planning.
A projected budget lists estimates of spending, material, sales, etc. This should be made at the beginning of the month
An actual budget shows actual quantities (amounts spent, revenue earned, employee hours worked, etc.). This should be made at the end of the month.
Difference between projected and actual results can give meaningful information regarding the decisions made by management.
By making budgets a necessary business requirement, you force your mind to think over what you need to do in your business and ways to progress.
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