A budget is a critical tool that allows a business owner not only to plan for and analyze expenditures but make changes according to the needs of the business. With the use of a budget, managers can plan for future financial needs such as emergency repairs, improvements, and expansions without having to resort to loans or lines of credit. Budgets can be created for the business at any point in time. However, creating a budget for each financial year is an important component of financial success for the business. This is because budgeting allows resource allocation to change according to the needs of your business. When developing a budget for a business, the first thing to do is to accurately determine the income and expenses of the business then apportion these items accordingly (Reecer, 2014).
Developing a budget is not an easy managerial task. Budgeting not only involves allocating funds to the different operations of a business but also gathering data about available resources and using cost-returns analysis to determine how to allocate those resources. Managers can use the following tips to successfully create budgets for their organizations.
Understand the Risk Landscape
It is important to get a complete understanding of the current position of the business before creating a budget. This includes knowing what risks apply to the industry and organization. Managers should investigate internal and external factors that may affect the business and create an allowance for these factors. If there is a high risk of accidents in the workplace or an impending government policy that could affect some aspect of the business operation, managers must take these factors into account. Using their CPA’s tools and expertise, business owners should also compare their organization against industry standards to determine if there are significant differences. Once the manager or business owner identifies all possible threats to their business or department, they can then effectively budget for the right types of insurance and emergency purchases (Light, 2018).
Realistically Estimate Sales and Overestimate Expenses
The sales budget is the foundation of the overall budget because projected sales revenue informs managers on how much they should budget for business operations expenses. Sales should be estimated based on either a realistic sales goal or based on the number of sales needed to offset the projected costs and reach the desired amount of profit. Since a budget is just a projection, it is okay for the manager to shift the sales target later (Rohr, 2016). Changes to the sales budget will impact the overall budget for production and general administration, and ultimately to the budget for labor, materials, and overhead. Conversely, the sales revenue target may need to be increased to offset unexpected business operation expenses.
Although a certain amount of sales revenue may be projected and many costs may be presumed to be fixed costs, the exact amount of income and expenses may vary. For this reason, expenses should be estimated conservatively. Managers should factor in every likely expense and then allow some leeway (Beers, 2018).
Manage the Budget Throughout the Year
Managers should regularly revisit their budgets in the context of the business’s sales cycle, past market trends, and any changes that may impact the business. When accounting for these factors, managers can amend their budgets accordingly. For example, it is common for businesses to have peak and off-peak periods in production and demand. During slower periods, managers can allocate more of the budget towards planning and marketing activities. Additionally, looking at market trends will help managers adjust the budget for expenses resulting from new legislation, changes in the labor market, or other updates (Caramela, 2018).