Budgeting, surprisingly, is the least considered process in terms of financial management despite it being a very important part of a business’s operational activities, particularly for small businesses. Budgeting is forward-looking, therefore a view into the” future” of your business’s finances, as opposed to financial accounting and reporting, which looks at the “history” of your finances. Both budgeting (or forecasting) and accounting / financial reporting are interdependent with each other. Below is a discussion of the “why, when, how and what” of the budgeting process.
Why is it important to do budgeting?
Arguably (and most obvious), the main pertinent reason for budgeting is to see if your business is meeting its financial targets and to see if the business will be making or losing money into the future, and consequently, will be able to survive. The key point of budgets is looking at profitability over a period of time, e.g. over the next 12 months, 3 years, or 5 years etc…
Budgets also enables you find ways to increase income, and at the same time drill deeper into current expenses that bring income to the business and those that are not contributing to the profitability of the business.
Budgets can also be used to value your business using advanced valuation models (e.g. present value calculations and predictions), as long as there is a reasonable degree of accuracy on the figures in the budgets.
When do you do budgeting?
This is usually done at the start of the financial year for a 12-month period, although you can do 3 or 5-year forecasts but ensuring that you update the budget annually or more frequently if necessary using actual figures along the way.
How do you do budgeting?
To do a meaningful and effective budget, it is best to use historical information, however you may start a budget from scratch if you have a reasonable understanding of the costs and revenues of the business from the start. For a yearly budget, if you are using historic information, take the income and expenses from the previous year’s actual figures and use those as basis for your categories in the budget. List the months (e.g. January to December) across in columns, and your income and expense categories downward in rows. Then plug in the figures for your budget for the entire year month by month.
Budget figures you come up with are mainly based on your targets, so for example when you want to come up the budget figure for sales for December 2019, you might look at the actual sales for December 2018 and target that you want a 10% increase on that figure based on current knowledge that you now have a new client or customer who is bringing in new revenues that did not exist last year. For expenses, you might target to reduce or eliminate a particular expense from last year completely as you find that it is not bringing in any income to the business, you may increase a budgeted expense based on knowledge that a supplier has increase its prices.
It is good practice that you, with the help of your accountant, produce monthly management accounts at the end of each month as you go through that year and perform a review of that month’s budget figures vs actuals, making commentary and investigating why the figures differ whether budget amounts are higher or lower than actuals.
It is therefore apparent that you maintain historic information as accurately as possible, keeping records of all your receipts and invoices. Normal business accountancy etiquette applies, including having a separate bank account for your business and minimize personal expenses against the business bank account.
What can Invicta do for you?
Invicta can maintain your financial records on the QuickBooks platform, with readily available reports at any point in time for any given period of time with a click of a button. We can provide you with monthly or quarterly management reports showing your profit or loss month by month and also your financial position at period-end, with a comparison to your budgeted figures. We can also present you with detailed analyses of your business’s performance through trends and ratios, assessing the relationships of your expenses on income, and your financial position at any given point of time. We can assist in preparing a budget for your through QuickBooks, with regular detailed discussions on your business’s performance and financial forecasting.
Call Invicta Accounting on 01624 672358 or emails us at firstname.lastname@example.org for assistance.