Budgeting can be a powerful tool used to define your business strategy. It can also provide timely information that enables a company to grow, meet goals, identify opportunities and help company personnel make successful decisions. In general, budgeting can aid in cash flow management by preparing in advance for future cash needs as well as identifying profitable segments of a business.
So why is it that so many businesses don’t prepare budgets or if they do prepare budgets they aren’t being utilized? The answer probably lies somewhere between the fact that they can sometimes be challenging, cumbersome and even time consuming. Don’t worry. It doesn’t have to be that way. Here are some tips you can use to help ease the burden and to ensure that your budgeting process isn’t so painful.
The Budgeting Process
Now that you know why a company should prepare and utilize a budget, the next logical question would be, “How do I get started with the process of preparing a budget?” Let’s focus on the three main areas of the budgeting process: creation, implementation and utilization.
When creating the budget for your company, the most important key is to ensure that the information you use to prepare the budget is current, comprehensive and goal-oriented. A good place to start is with the historical financial performance of your company. Pull data from recent periods, consider the economic climate in which you operate and utilize that information as your starting point. Review industry trends and key economic performance indicators to see if you are relying on the right metrics for your company.
Last but not least, make sure you clearly define all assumptions. This is a crucial step in the budget process that will save time in analyzing the budget. A simple legend located at the top of each page of the budget report will help highlight the current year assumptions and/or the changes from the prior year assumptions for management. The result of clearly defining all assumptions will decrease unnecessary time lost by management in trying to understand variances.
The implementation stage of a new budgeting model can range in complexity, duration and cost. Budget models can range from simple spreadsheet files to more sophisticated software models. No matter which path you take, make sure to outline the process and budgeting guidelines. Issuing a tightly structured budget procedure along with a time schedule for completion will help to ensure that the budget can be utilized to make decisions. In addition, setting expectations up front will help to create accountability among the key decision makers. This will allow personnel to adhere to the budget while executing on the goals of the company.
An excessively long or detailed budget can create problems for management because too much information has been provided to make timely decisions. One solution is to create a summarized version of the model for upper management. This allows management to focus on key information and act more quickly on the budget model provided. You might also want to consider creating this summarized version in Excel, which would give management the latitude to work with the data using various “what if” scenarios.
A budget can quickly become outdated and unusable if the information provided by the budget model is not continually analyzed and updated. A budget should be examined on a regular basis to determine that the correct information is being reported to the decision makers of the company. With an accurate view of where you have been, you can better chart a course for where you should go.
For assistance with your budgeting needs, please contact your Meaden & Moore representative.