Budgeting

A budget is an important part of the business plan for an owner-managed business and is the detailed planning for how funds are to be allocated in the business. Once the strategic (long-term) part of the business plan is in place, the budget deals with the distribution of cash to execute the plan.

Putting the budget in place will show where the strategic plan is realistic and where it is not realistic. It will help answer the concern of whether the goals of the strategic plan can be reached. The budget will also help with the choice of what methods will bring you closest to reaching the goals of the strategic plan.

The budget will be a projection of the income statement for the business. Comparing the budget to experience will give you the opportunity to examine why there is a difference. Answering questions about the difference will make the next budget more realistic and more effective.

Also the owner-manager should be asking am I getting enough from the business? As a manager you should receive compensation for the management and other services you render to the company? As an owner, you should receive a return on your investment in the business. The budget should plan for this compensation and return on investment.

Effective budgeting requires adequate accounting information to allow comparison of your forecast budget with experience. After you budget a profit and loss statement projection, you will be interested in receiving an accurate profit and loss statement in a similar format on a frequent basis.

In analyzing the budget look at the chart of accounts and determine what accounts are fixed costs and what accounts are variable costs. Variable costs usually change with sales. Sometimes variable costs rise unreasonably because variable costs are not managed effectively. Variable costs that are rising when sales are falling must be carefully examined. Review and question the arrangement for fixed cost circumstances, the costs may not be as fixed as was first assumed.

The budget is a tool that will help you understand why things did not go as planned.