Why Budgeting is Important
In simple terms, a budget is basically a spending plan to determine whether or not you will have enough money to cover costs over a given time frame. A monthly budget would factor in your income and your expenses with the end result being either a positive or negative number each month. A good budget will go a step further and help you plan for the future of your business.
Finding the Balance
Budgeting shows you whether or not a balance exists between income and expenses. The very same process is used in personal budgeting right on up to corporate budgeting. The goals are always the same – to balance the two or at least arrive at a surplus of revenue versus expenses. When the balance is tipped towards an excess in spending, then you have a problem on your hands. This is where the budgeting process becomes a valuable tool in sorting things out.
Trimming the Fat
The really interesting and most valuable part of making a budget is discovering places where money being spent can either be reduced or shifted to cover the cost of something else. In a personal budget, one way to reduce excessive spending may involve lifestyle changes. For example, eating out at restaurants every night could be reduced to two nights a week giving you a huge saving and extra money in the budget to spend on something else.
In the corporate world, cutting expenses is a regular way of life. When business is slow, revenues are reduced and cuts have to be made in order to stay in business. This sometimes results in severe cuts in departments to the point where downsizing occurs and some people lose hours or their jobs in order for the company to find the balance between revenues and expenses. Cuts may also be made in redundancies within the company to avoid lay-offs or cut backs in hours.
Building the Budget
One way to attempt to keep finances balanced is by creating a budget forecast. What this really is, is a projection made based on the costs and revenues you are aware of. In a home budget this could include utilities, rent, food, transportation and entertainment. Figures gathered from previous months could form the foundation of the cost forecast for the next few months. The amount of income collected from previous months would give an average figure that could be entered into the earnings portion of the forecast. The goal again would be to find a balance each month but with a forecast you would have advance warning of potential increases of expenses or income if factored into the equation. The very same method is used with business financial forecasts.
Budgeting for Growth
Well thought out budgets can be used to drive growth or identify unexpected opportunities. If you are looking to grow your business you can work out what it would cost to create that growth and include it in your budgeting plans. This will help you understand if you can afford those plans or if you need to make adjustments to help manage your risk.
After creating your budget you might also find opportunities you wouldn’t have otherwise known about. A surplus in a given month might allow you to invest in advertising, new equipment or even into your workforce.
It’s All in the Numbers
When you strip it down to the basics, budgeting doesn’t have to be more than some simple maths. The bottom line is a simple formula – income minus expenses equals either an excess or a deficit. But creating a good budget can be so much more as it can help you plan for the future growth of your business.
Next Steps
Most bookkeeping systems have a budgeting tool built in including Xero, MYOB and Quickbooks which will also allow you to compare your actual vs budgeted figures in an ongoing basis.
If you need help planning or updating your budget contact us to find out about our advanced forecasting tools that go a step further than your average budget.
