Introduction
Ask most small/medium sized business owners what an annual budget is, and they will likely respond with something like: a financial plan for a firm’s future that projects revenue and expenses.
Ask them if they have one, however, and in many cases, you will get a variety of excuses why they don’t.
When running a business, it’s easy to get bogged down with day to day problems and miss the bigger picture. Successful businesses allocate time to create and manage budgets, prepare and review business plans (ie. Next 3 to 5 years) and regularly monitor their financial situation and business performance.
Budgeting identifies current and projected available funds by month for the 12 months that the budget covers, anticipates incoming revenue, and provides an estimate of expenditure to achieve the sales target.
By referring to the budget, businesses can ensure that resources and funds, are available for initiatives that support business growth and development.
It enables the business owner to concentrate on running the business, improving profits and increasing return on investment (ROI).
Budgeting is a key element for achieving business success. It helps with both planning and control of the finances of the business. If there is no control over spending, planning is futile and if there is no planning there are no business objectives to achieve.
What is an Annual Budget?
An annual budget is a plan to:
- control the finances of the business
- ensure that the business can always fund its current commitments
- enable the business to meet it objectives and make confident financial decisions; and
- make sure that the business has money for future projects and commitments.
The benefits of budgeting should never be underestimated when running a business:
- budgeting estimates revenue, plans expenditure accordingly, and restricts any spending that is not part of the budget
- budgeting ensures that money is allocated to those things that support the strategic objectives of the business
- a well communicated budget helps everyone understand the priorities of the business
- the process of creating a budget provides opportunities to involve staff, resulting in them sharing the organisation’s vision; and
- engaging the team in reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.
If you are running your business without a proper budget, you may find you’re actually just running around in circles and not meeting your long-term goals assuming you have defined and quantified them.
By taking the time now to set a budget, you will free up time in the future and give yourself the best chance of achieving the rewards you want for your hard work.
Who is responsible for the budget in a business?
The Chief Financial Officer (CFO) is ultimately responsible for managing the company’s finances, including top-level budgets.
The CFO bears much of the responsibility for reviewing and finalising corporate budgets for submission to the Board or Executive Management team, based on input from the accounting team and divisional managers.
An annual budget lays out a company’s projected income and expenses for a 12-month period. … ideally, month by month, at least quarterly. In many instances, a business’s annual budget P&L is expanded to include a balance sheet and cash flow statement.
The Budget Process:
Annual Budget Calculation -scott-graham–unsplash
Step 1. Collect your numbers to create an annual budget. You can start your annual budget by reviewing the annual profit and loss statements from the last two years
Step 2: The first step in creating your operating budget is to make a sales budget.
Step 2: Budget your variable costs based on the budgeted sales. Ie, costs that vary directly with the level of sales…
Step 3: Budget your operating expenses required to achieve the budget.
Step 4: Allow for unexpected expenses. (A Contingency)…
Step 5: Track your actuals monthly against your budget monthly. Establish why it has changed and take action to fix issues, take advantage of opportunities and maintain a full year forecast that is revisited and updated, if necessary, every month.
So, Why is Having an Annual Budget Important
A solid budget serves as a road map for a Business Owner or CEO to ensure that they are on track to meet their goals as they navigate through each month, quarter, and year.
The point is to establish definitive sales and spending targets that you can use to measure the success of your business strategy and manage your financial resources.
Aside from being a benchmark, a budget is also an important tool that can actuate change by holing the relevant Managers accountable for their achievement.
Also, provides benchmarks for setting target incentive plans
More Specifically
1. Your Budget Curbs unbridled spending
Owners and department managers will more carefully consider their purchases if there are spending limits – and accountability if they exceed those limits.
However, disciplined spending doesn’t mean deprivation. The beauty of a detailed budget is that it illustrates how the numbers are connected; how an increased expenditure in one department can be balanced by a decrease in another.
This understanding incites managers to work together and avoid overspending without sacrificing necessities.
2. Motivates employees
It’s important to communicate the company’s goals to your team and make it clear that the budget makes it possible to fund those goals.
A simple statement like, “We need to make $X in sales and spend no more than $Y in expenses in order to have the funds to expand into Z market by the end of the year,” gives employees a quantifiable goal on which to focus.
A budget may even inspire staff members to think outside the box for solutions to sales shortfalls or expense overages in an effort to help the company hit its targets.
The result is a unified, engaged and committed team, which in turn, reflects on the company.
3. Keeps stakeholders on the same page
Of course, investors, shareholders and other interested parties want your company to succeed, but they also need to protect their interests.
So, when you want to expand your business in any way (which always results in increased expenditures), it’s in your best interests to have a solid budget, and ideally a Business Plan in place to give stakeholders confidence that your finances are being well-managed and to get them on board with your goals.
When all parties are in agreement with the company’s objectives and the plan for meeting them, it’s much easier to gauge progress and work together to keep the company on track.
Once you begin using your budget to measure performance, you will almost certainly realise additional benefits unique to your company or industry.
CONCLUSION
A solid budget serves as a road map for a business owner to ensure they are on track to meet their goals as they navigate through each month, quarter, and year.
The Chief Financial Officer (CFO) is ultimately responsible for managing the company’s finances, including top-level budgets.
By referring to the budget, businesses can ensure that resources and funds, are available for initiatives that support business growth and development.
It enables the business owner to concentrate on running the business, improving profits and increasing return on investment (ROI).
Keeps stakeholders on the same page. Investors, shareholders, employees and other interested parties want your company to succeed, but they also need to protect their own interests. Having a solid budget and ideally a Business Plan in place gives stakeholders confidence that your finances are being well-managed and gets them on board with your goals
#Annual Budget #Business Plan #Financial management #Financial control #Financial reporting #CFO
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