Budgeting Your Business Towards Strategic Success

Do you have a way of knowing about any looming cash flow problems in advance?
Unless you use properly prepared forecasts, the answer is probably no.

It is a tool which will help you to set achievable financial targets for your small business. It will help you to anticipate problems and compare what has actually happened with what you expected.

Purpose

Budgeting will play the function of helping you to estimate revenue and expenses expected to be achieved over a specified future period of time.

Most of us are accustomed to hearing national and corporate estimates being read out, but the process can relate to our personal needs or just about anything else that makes and spends money.

Common Terms

It is also a microeconomic concept that shows the trade off made when one good or resource is exchanged for another. Hence various terms are used.

A surplus budget means profits are anticipated; a balanced one means revenues are expected to equal expenses; and a deficit means expenses will exceed revenue.

It is usually compiled and re-evaluated or reviewed on a periodic basis to provide for any changes in future projections that may be affected by occurrences that are arising today or where not foreseen at the initial time of drafting the plan.

For example, you may have drafted a three year forecast and projected that your business profits after all expenses would be 10% of sales. However, in its July national budgetary speech, government increases the VAT threshold by 2%.

Failure on your part to pass on the tax burden to your price sensitive customers means that you will pay part of your projected revenue to government as tax and reduce your profit.

Some Adjustments are made to draft plans based on the goals of the forecasting entity. In some cases, budget makers are happy to operate at a deficit, while, in other cases, operating at a deficit is seen as financially irresponsible.

For example a manager of a small business or local charity club may choose to spend more than what his board approved by acquiring excess debt or liabilities in order to justify the need for an increase in membership subscriptions or price revisions.

But on the other hand, the performance of the manager will be at stake if they spent more than they can earn, because they would have spent shareholders capital in the business.

Composition

A master forecast is a plan that demonstrates in monetary terms the activities that characterize your business.

The activities are usually characterized as assets, equities, revenues and expense items that will be involved in carrying out the forecast plans.

The master plan is in accounting terms a set of projected or planned financial statements. It consists basically of a Pro Forma Income Statement, Pro Forma Balance Sheet, and cash flow forecasts. It is a tool that you will use to enhance planning and control of your business operations.

At the beginning of your planning period e.g 1st January , the forecast will serve as a plan or standard; while at the end of your planning period e.g 31st December, it will serve as a control device to enable you measure annual performance against the plan, so that you can improve your future performance.

Types of Budgets

Zero Based – ZBB

Based on a method which requires you to justify all your expenditures each new planning period, as opposed to only explaining the amounts requested in excess of the previous period's funding.

Activity Based – ABB

A method in which you define, justify and establish the relationship between activities that incur costs in each function of your business . You will then use this information to decide how much resources you need to allocate to each activity.

Incremental

This is a plan you prepare while referring to or using the previous period’s budget or actual performance figures as a basis. You then add incremental amounts to forecast information for the new planning period.

Rolling

A Method in which you continually amend the plan you established at the beginning of an accounting period in order to reflect any variances that may have arisen due to changing circumstances.

The budgeting process speaks volumes about your business strategy and could make the difference between success and failure of your small business. We advise that you contact your CPA for an independent opinion about your draft , or contact us, for online support.

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