Ramp-up your Budgeting – Apply Best Practices
Budgeting Better will Improve your Profits!
Fist a reminder:
A budget is a listing of what you intend to earn and spend, usually during the next financial year – it should outline what you want to get done in your business in monetary terms. If you don’t make the resources available to fulfill your goals how will you get there? This is why having a budget is so vital.
The last few posts have focused on how to pull your budget together. But a budget, as with any report, is only useful if it improves decision making. Just in case you missed these:
* How to Start a Budget and why Bother
* How to Build a Budget (and improve your profits)
- STEP 1 Gather your Budgeting Calculating Ingredients
- STEP 2 Write down your Future Plans
- STEP 3 Sort out your Future Plans into Budget Headings
- STEP 4 Apply the dollars to your Budget Headings
- STEP 5 Do a Profitability Check
Ok, so assuming you now have your budget all set and ready to go, let’s look at budgeting best practices…
A Forecast is a reflection of how your business is expected to track, based on what you have done to date, what you said you were going to do (your budget), and therefore what is left to get done.
Budgets are often tied to forecasts, and are in-fact most useful when they are “rolling”.
I’m not kidding a rolling budget is an absolute Business Essential to be able to make more money!
In large corporations budgets are used as a way of allocating resources, checking on management and locking down shareholder returns – sticking to them is therefore critical. Budgets therefore become a force majeure and meeting the budget an essential performance requirement. Forecasting is used as an additional way of enforcing and predicating behaviours.
HOWEVER – in small business you can spend forever predicting, adjusting and messing about at the expense of earning money!
So, A combination-document of forecast and budget is what we recommend.
Use your Budget better by taking more relaxed approach to budgeting; stay current, and keep your eyes on the ball….
This way you only spend a little bit of time each month on the admin, but everyone still has a CURRENT road-map to work with. The steps below minimise your efforts and maximise your profit…
A Rolling Budget is when you set your budget at the beginning of the year, track your progress for what you have achieved and then adjusts it to create a forecast of what you still intend to achieve – it enables you to continually plan 12 months in advance, rather than creating a forced horizon at a specified year end date (eg 30 June).
Think of your NaviMan (that thing in the car that shouts directions at you)
- Your budget is the calculated path based on the destination you plug in at the beginning
- The forecast varies from a budget as you hit road-works, take alternative routes etc – ie when the voice yells “ RECALCULATING RECALCULATING” is “forecasting” your new path and new time of arrival based on the events that have happened in real time.
Budgeting Best Practices
1. Set-up and maintain a Rolling Budget
– Then start a spreadsheet* using Last Month’s Actual Figures, let’s say we start at July 2014, and so the first column in your budget will be the actual figures for June 2014
– Using what you already know from your actuals, fill in the gaps for the next 12 months to create the total of your budget (the links above give lots and lots more detail on this if you are a newbie)
– Save it and Print it out! And put that printout in the bottom draw for later use
– Update the future months’ budget figures when and where necessary, to reflect speed-bumps, opportunities etc that you are now aware of
Tah-Dah you have a Rolling Budget!
*Most accounting programs will enable you to do this within their system – if this is available use the system generated budgeting module in preference to a spreadsheet because it will automatically do a lot of the variance calculations for you & it will most likely do so with fewer errors.
2. Confirm how accurate you are at Rolling Budgeting
After 3 months, and again at 6 months, grab the print-out from Step 4 from the bottom draw and assess how accurate your budget was (what did you get right, what did you forget or overlook); start again at Step 1. if you need to or re-tweek to improve accuracy. Take a printout and check back again regularly – tweaking and adjusting as you go.
3. USE the information to make Better Decisions
Regularly do a quick review of Actuals against both planned and predicted, checking for variances – which line items are are good or bad; what is working and not working. The most powerful use of a budget is:
- Identifying WHERE there are differences to what was expected/predicted
- Understanding WHY the difference arose; is it permanent or simply due to some timing anomaly
- Deciding WHAT needs to be done – either a correction of your prediction or a correction of your activities to re-align the outcome with the prediction
Last week’s post 5 Tips for fixing Budget Variances has heaps more detail on how to do this.
Don’t be afraid of budgeting, or think it is “all too hard” – Budgeting is the single, fastest, and most accurate way for you to rapidly improve your profits exponentially!