We are all familiar with budgets: personal budgets to keep track of spending and income, household budgets that keep expenses on track and plan for improvements or even to help save for vacations. And there are business budgets. From mom and pop stores to multinational corporations, all enterprises need to have them and track actual expenses against them.
Business budgets are quite different from personal budgets. Instead of simply determining how much income there is and on what its being spent, budgets for companies can act as a report card for their spending practices while keeping expenses under control and avoiding spending more money than the company has available.
Getting off the ground with your budget. To get started, business owners should create a master budget, also known as a static budget. This is populated with overall planned income and expenses for the company. When crafting the static budget, business owners need to spend some time and effort forecasting the upcoming fiscal period in order to determine realistic inputs and outputs. This budget serves as the guideline for the company’s finances.
Changes are allowed. In business as in life, unexpected expenses arise. A static budget serves as a guideline but it is not set in stone and can be changed when the need arises. It’s important to remember that changes should be made as needed, not necessarily just for convenience. You spent a lot of time and effort creating the budget; so don’t throw it out the window at the first sign of things being a little different from what was planned.
Tracking actuals against the budget. Next, when the financial period has drawn to a close, it’s time to compare. At this point, you should create a flexible budget that shows what has actually happened in the business.
In a flexible budget, the budgeted amounts (for example, costs or selling prices) are multiplied by units to determine what the costs would be based on different levels of sales or production. This would help determine if there are reduced costs by increased production, which would be classified as variable costs. Fixed costs, which typically do not change, are also a component of the flexible budget.
When variable and fixed costs are combined into the flexible budget, you will be able to compare actuals against the budget and see where the company exceeded expectations and where it fell short. At this point, you will be able use that information to better inform the new budget for the upcoming fiscal period.
Flexible budgets are the gold standard in big business but should not be seen as not for small businesses. On the contrary, this type of budgeting is invaluable for businesses of all sizes and can help business owners to get, and keep, a handle on the comings in and goings out of their businesses.
Tracking actuals versus your budget is a critical ingredient to success. Without having a good handle on what your business is doing, you won’t be able to properly manage the status quo, let alone growth.