Many business managers and owners view budgeting as a necessary evil. It may not be everyone's favorite activity, but it's important, because an effective budget can help you optimize use of your resources. With a comprehensive view of financial and non-financial data, you can accurately understand the true cost of your products and services. You can grasp the big picture of the company's position and evaluate and understand the effect of various factors on it, such as market conditions or changes to product and service lines. Ultimately, with an effective budget you are able to make better, more informed decisions.
Following these seven best practices can help you enjoy a more efficient outcome and easier budgeting.
- Clearly define the budgeting process.Spell out the timeline, objectives, resources and key performance indicators (KPIs). Communicate clearly so everyone involved understands the overall process and their role in it.
- Consider the amount of detail needed. Many organizations can reduce the level of detail included in the budget to good effect. You can create plans in greater detail for the short term and less detail further out.
- Streamline the process. Reduce both the time and number of iterations allowed in developing the budget. Condensing the process can make your budget more relevant to current conditions. Streamlining allows management to get the information it needs in less time, at lower cost and with less disruption to the company's core activities.
- Take advantage of tools. Make sure budget developers are trained in new information technology that can help automate much of the process.
- Move away from the once-a-year model. Update your budget regularly to reflect reality. If material changes occur during the year, you need a process to evaluate the effects of those changes and adjust budgets and plans accordingly.
- Plan for the unexpected. Consider what could happen — volatility in your market, changes in resource levels, new strategies — and build in flexibility to address "what if" scenarios.
- Use your budget. It can help you make important decisions. After all the effort that goes into producing budgets, they are too often ignored until the next budget cycle. Your budget can help you:
- Control expenses. Determine if you have the income necessary to afford an expense you are considering.
- Project cash flow. Your budget can tell you if, and for how long, you will need a line of credit. It can also indicate when you can afford investments in the business.
- Identify areas where additional scrutiny is needed. Compare your budgeted financial statements to actual statements to find areas that are underperforming or should be adjusted in future budgets.
Worth the effort
An effective budget can help you measure progress toward your goals, help control spending and predict cash flow and profit. And those things can help your business grow and thrive. For more useful tips for keeping your business running smoothly, visit California Bank & Trust's Business Resource Center.[cite::171::cite] [cite::172::cite]