Strategic Business Solutions
| Build a better budget for enhanced cash flow |
| Published Wednesday, January 28, 2009 9:00 am |
In this time of economic fluctuation, it is important to use your budget as a guide against which you track your actual results. This process can help you spot trends and make adjustments to your business as necessary to assist you in reaching your goals. It is just as important to adapt to changing conditions as it is to create a budget in the first place. Consider these six steps for better budget management.
1. Lay the groundwork. A budget is a financial representation of your business. It is a major portion of a business plan. Business plans are created in order to market your business, attract investors, or obtain financing for your business. The market will dictate how successful the company will be, but a well prepared business plan and budget will help you organize your business even before you have your first sale or earn your first income.
Do not set unrealistic goals for a budget and then try to use strategies to meet them. That sequence completely ignores the marketplace and can sabotage your plans for a successful endeavor. A better approach relies on comprehensive business plan, which takes into consideration realistic goals for income and growth.
2. Collect vital information. Past performance is generally the best indicator of future performance. Develop the budget based on financial performance for the last two to three years. To accomplish that objective, it will be necessary to gather balance sheets, income statements and cash-flow statements.
Rely on various other information sources to analyze market trends. These can include industry guides and census information, as well as your knowledge of the market. It is often essential to assemble a business advisory team that can assist in this process.
3. Create a rough draft. The initial version may reflect trends from the last three years relating to sales and marketing, direct costs, overhead, operation support, labor and average gross margin. Make adjustments to the income statement portion of the budget based on the upward or downward trends of the business, where you realistically expect your income to fall.
Remember that a "rough draft" is not meant to be the final product. It should be viewed only as a starting point.
4. Be realistic. Contractors and sales persons are often overly optimistic about sales and gross margins. It is time to hold an honest discussion with operations and sales divisions. Challenge assumptions that may not stand up over the period of time you are budgeting. Unless technology or other conditions have improved, do not assume that labor will be more productive than in the past. Also, question any "pie-in-the-sky" projections from the sales team.
Discuss the real markups produced by each department. Refer to job costing reports for exact numbers; then adjust the budget accordingly.
5. Roll out the budget. Once you have completed your budget, make copies and distribute them to anyone with spending authority. Schedule a meeting to discuss the particulars. The managers in the meeting must fully understand the expenditures planned under the budget, the rationale behind them, the assumed gross margins and the timing of events. They should also be made aware that they are going to be held accountable for variances that may occur.
6. Track the progress. This is where management often becomes lax. It is extremely important to continually monitor results and take action when required. Have accounting professionals generate an income statement and cash-flow statement at the end of each month and compare the actual results against what you had budgeted.
As variances become apparent, investigate the reasons. If necessary, do not hesitate to confront under-performing employees and discuss alternate work methods. If these variances are controllable, it is important to make changes to bring your results back in line. Finally, determine whether it is necessary to revise the budget. Changes in the economy and marketplace as well as large variances in your actual to budget comparisons may require that you make revisions to your budget.
The responsibility for these six steps falls squarely on the shoulders of the company managers. Do not shirk it or ignore it. It could be the difference between profit and loss in your organization.
Strategic Business Solutions
Your success is our business. As a business owner, you must look to the future, plan for growth and cope with day-to-day business demands. You also have the responsibility to find the resources to help you - those individuals who provide experience, information and guidance tailored by thorough knowledge of the special needs of growing businesses. We have the resources available to assist you with the growth and profitability of your business. For more information about our Strategic Business Solutions, please click here.
April J. Green, CPA is a Manager in the Strategic Business Solutions Department and is based in our Sunrise office. With over 15 years of experience in accounting, she has owned her own business and served as Chief Financial Officer, Director of Finance, and Controller for large corporations. April brings that financial expertise to clients while serving as a Fractional CFO, an executive who assumes the role of an internal CFO on a recurring, as-needed basis. She focuses on providing consulting services to mid-sized companies in the areas of strategic planning, financial modeling, due diligence, internal control analysis, budgeting and projections, and obtaining working capital.
Send this page to a friend
(C) Copyright Daszkal Bolton LLP (2009). All Rights Reserved.
CIRCULAR 230 DISCLOSURE
To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that any advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This advice may not be forwarded without our express written consent. For more information about the Circular 230 disclosure, please click here.
