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Business Management - The Importance of
Maintaining a Budget
By Leah Thiss of BBBS Inc.
Do I really need to prepare a budget? It may sound like a
daunting task or feel like you’re just shooting in the dark, but a budget is
one of the most important business tools. Done right, it can help you manage
your business and keep you on track to reach your goals.
A few things to keep in mind as you venture down the budget path: 1) You
won’t get it right the first time - or maybe ever - a budget is your best
guess and that’s okay; 2) You will get better at “guessing” over time so
don’t give up on it too soon; and 3) Your budget is a guideline only. Use it
to bring discipline to your spending, but don’t let it tie your hands. Go
beyond your budget when you need to, but be sure you understand why so that
this insight can guide you in future budgeting.
Where to Start - Even though a budget is an estimate or guess,
it should be based on as much real data as possible. Pull as much historical
data on your revenues and spending as you can. Get estimates for anticipated
expenses. Divide your revenues by products/services and itemize your
expenses by meaningful categories: cost of goods sold, salaries, marketing
and advertising, rent, facilities maintenance, utilities, office supplies,
and other overhead expenses. If you’ve been tracking your expenses in an
accounting software program like Quicken or QuickBooks, you should have this
information readily available. If not, use your vendors to help you pull the
information together. Your suppliers should be able to provide a record of
how much you have spent with them over the past year or more. If you charged
many of your business expenses, most credit card companies can provide a
summary of your charges broken out by basic spending categories. The more
complete the data is to start with, the more reliable your budget will be.
Be Conservative - When putting together your budget, overstate
your expenses and underestimate your sales. Plan for the “worse case
scenario”. If your cash flow projection is positive using these conservative
estimates, your budget should be fine. If you are unfamiliar with the term
“cash flow”, it’s simply the tracking of cash deposited into your bank
account and cash flowing out of the business during a set period of time. If
your cash flow is projected to be negative, you need to be prepared to line
up a cash infusion, find ways to cut expenses, or work with your vendors on
terms that work better for you. Most businesses look at monthly cash flow,
and cash is exactly that - cash - and does not include sales that go on the
books as accounts receivable. The basic formula is the starting cash (what
you have in your bank account) plus money you intend to collect minus money
used to pay your bills. Predicting and planning cash flow is especially
important in businesses that tend to be seasonal or have periodic high and
low sales periods.
Be Flexible - In order to live with a budget, you need to be
flexible. If your revenues are down, you may need to find ways to cut your
expenses. On the other hand, an opportunity may arise that requires you to
make an investment you did not anticipate. Think it through before you veer
off of your budget, but know there will be times when straying is warranted.
With a budget in place and cash flow projections calculated, you’ll be
making an informed decision and can accurately weigh the risks verses the
benefits of each opportunity.
Be Vigilant - Review your budget every month. Compare actuals
to estimates. Be sure you have the cash flow to meet or cover your upcoming
liabilities. If not, make corrections to keep you in the positive. You can
cut expenses that aren’t critical to business operation, seek a temporary
extension of terms with a vendor, or tap into a source of cash. It’s always
good to have a line of credit in place to cover you in times of negative
cash flow. Be sure to set this up in advance. Always ask financial
assistance before you need it. And if you find yourself with more cash than
you projected, set the funds aside as a cushion or contingency to cover
months that may come in short.
For those who aren’t using an accounting software package already, consider
starting now. An accounting professional can help you choose and set up the
software that will work best for your business. They can also train you on
how to use the software and set up the reports you need. Most programs will
allow you to enter your budget data so the program can automatically track
estimates verses actuals, making reviewing your budget status a snap!
A well-prepared budget is about much more than just curbing your spending. A
budget can guide your business in the right direction. The act of budget
preparation forces you to think through how you will bring in revenue and
what it will cost to reach those sales goals. This can lead to more informed
decisions about what type of business to pursue and the most effective way
to close those sales. Budgeting also requires you to itemize your expenses
and understand what the cost of doing business really is. This can lead to
more sound choices of expenditures you must make, what investments will
return the highest value, and what expenses can and should be cut.
So, do you need a budget? Working with a budget will put you in touch with
how the cash flows through your business. It will eliminate surprise cash
shortages. It will help you identify potential money drains on your
business. It will stop impulsive spending. And it will definitely improve
your odds for profitability. So the answer is “Yes”!
Leah Thiss is the CEO & President of BBBS Inc., an outsourced
accounting & bookkeeping company. She has an extensive financial, management
& technology background. Contact:
leaht@bbbsinc.com or
www.bbbsinc.com
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