“We spend more than we make! We need a budget.” We have all had that conversation with our partner. We begin the process, argue about who spends too much on what, make spending cuts, put it on paper, and blow it within six months. Good people find themselves in a worse spot, continuously short on cash and long on debt. In any event, many attempts fail the process because the goals are unrealistic, no cushion is planned, discipline to see the changes through is lacking, or all the above. The cycle continues, with many continuing life paycheck to paycheck. When we do that in business, the business is destined for failure. It does not need to be that way.
Budgeting for business can be a tedious process. However, once prepared and used to monitor and evaluate actual results, it can yield great benefits to identify what is going well and what is not going well in your business. Knowing that will allow management to take corrective action and move a company closer to its goals. Plan for success. And once you complete the process, it becomes easier, and yes I am going to say it, fun to use!
Budgeting is the process of determining your desired future financial performance and creating a plan to achieve that result. Many times, the use of historical data aids in establishing baselines and determining reasonable relationships among revenues and expenses. However, desired changes may require the budget to reflect different future relationships. For example, your personnel related expenses normally run 35% of gross revenues and you are planning to add another revenue stream that is more labor intensive. Keeping your budgeted personnel cost at 35% may not be adequate. You must accept a higher personnel cost percentage or increase the cost of the new service to overcome the additional labor requirement. Either way, understanding your budget and the relationships between revenue streams and related costs will help you prevent financial surprises.
There are four steps in the budget process:
- Determining Financial Goals
- Budget Development
- Monitoring Results
- Evaluating Results
Determine Financial Goals
What do you want your future financial performance to be? Are you focusing on controlling your expenses? Or do you have plans to grow your revenues or market share? Knowing what your financial goals will go a long way in putting together a meaningful budget. “I want to make more money” needs a plan.
Using the financial goals determined in the first step of the process, create the budgeted results.
For example, if your financial goal is to control expenses and you are expecting no significant growth in revenues from the current year, your budget would show revenue similar to your prior year amount with a focus on controlling key expenses that when reduced, would lead to higher net income for your budgeted period.
Alternatively, a budget for a growth-oriented year would reflect the desired increase in revenues. The expense accounts related to that revenue production would then be based on the budgeted revenues reflecting any expected cost increases to produce that revenue.
How can you grow revenue without spending it all as expense? Can you withstand a reduction in revenue without reducing net income? Knowing the relationships between revenue and expense can help you obtain your desired results.
As the year progresses, reports comparing actual numbers to budgeted are necessary tools to help management monitor company results. Differences between the two sets of numbers identify what revenues or expenses exceed, meet, or come in under budgeted amounts. Whether or not those results are good or bad depends on your financial goals and how the difference flows to the bottom line, your net income. Evaluate these differences to determine if operations are being managed to achieve the financial goals set in the budget.
Evaluating the over and under budget amounts is the key step in determining what processes are working to achieve desired results and more importantly, which ones are not. Knowing which financial goals are unrealized and then determining why, will help steer management in taking corrective action that will get the company back on track to achieve its desired results.
Importantly, you must have the discipline to stick with your budget plan. Monitor and evaluate your progress with each set of monthly financial statements. As time goes on you will have a better feel of your financial performance and be able to make informed business decisions, not decisions based on a hunch.
Many modern accounting software systems have features that allow users to obtain reports which can be useful for budget development, and budget to actual reporting options that can make the monitoring and evaluation steps a little easier. An Industry CPA is trained and experienced to assist you in this process.
Let us at BUSBooks help you develop and monitor your budget! Together we can move you toward your next goal.
The next Nerd News will discuss your Chart of Accounts: Making more sense of your numbers.
Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator
BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.