The Secrets To Budgeting

What is a budget? A practical means of telling the money where to go, rather than simply wondering where it went. Surely, there are many people, in business and otherwise, who have found themselves wondering where the money went. And perhaps they were wondering this because they spent it without having a specific spending plan in mind.

Just about every business–including many of the smallest, even one-person businesses–needs some kind of spending plan or some means of looking in advance at the money that must go out relative to the money projected to come in. That, in essence, defines a budget: a projection of both income and expenses for a coming period of time.

Why use a budget? In a practical sense, this question is answered in the opening statement above. There are, however, additional reasons for using a budget. Someone who seeks a business loan or other financing for business purposes, debtor finance for example is usually expected to produce a business plan, which invariably includes information concerning projected income and expenses. No business venture should ever proceed without planning, and a budget is the financial plan for conducting business in the near future.

An operating budget consists of three parts:

1. The statistical budget, which is the best available projection of business activity for the coming year (units or pieces to be produced, contracts to be secured, estimated business activity, etc.).

2. The expense budget, which consists of all anticipated costs of operating the business and conducting the projected level of business.

3. The revenue budget, which is a projection of estimated income for the coming year.

A capital budget accounts for potential expenditures for major fixed equipment and major movable equipment (copy machines, computers, plant and equipment etc.).

A cash budget is usually prepared last in the budgeting process and consists of estimates of the business’ cash needs for the year, as compared with projections of the cash receipts for the year.

The need for serious consideration of the cash budget is, itself, sufficient reason to justify the budgeting process and the work it involves. The pattern of cash-in versus cash-out is extremely important to any business because of the need to always remain financially solvent in the short run. It does no good to appear rich on paper–to own numerous physical assets or be owed significant amounts of money, for example–if you do not have sufficient cash in the bank to pay today’s and the short term futures bills. Many an enterprise that appeared solvent on paper has failed because of its inability to meet current cash obligations. At the very least, a cash shortage can trigger short-term borrowing, a short term loan can at times be the only solution.

Some principles and practical rules of budgeting for the small business are:

• Every item of expense in the business must be under someone’s direct control.
• Managers responsible for complying with an expense budget must participate in preparing the budget.
• No one should be held responsible for expenditures over which he or she has no control.
• Unused funds budgeted for expenses may not be carried over from one year’s budget to the next.
• Unused capital-budget funds may not be transferred into operating expenses or vice versa.
• All individual expenditures must be approved by the appropriate levels of responsibility.

A breakdown of the expenses charged to a department or activity, such as salaries, benefits, supplies, travel, postage and such, is essential. In other words, you must keep track of how much money is going into each category of expense, as well as how much you are spending in total.

A budget cannot be adequately prepared during the final week or two before the new budget period begins. In the majority of cases, the most accurate indicators of future costs are past costs adjusted for whatever is known about the coming period, such as changes in business activity and expected price increases and the like. This suggests that you should collect information used in preparing the budget, especially information concerning expenses, several months ahead of time.

No one knows for sure what the future–even the very near future–will bring, but an intelligently prepared budget can minimize the likelihood of finding yourself wondering where the money went, and enable to the director of the business enough time to source alternate funds, such as short term business loans, factoring facilities loan term business loans.

Lastly, obtaining assistance from a corporate advisory firm to review and provide guidance on budgeting issues is a great place to start.