Most would not consider the preparation of an annual budget to be an accounting cleanup task. After all, cleanups suggest a state of disorganization while budgets tend to connote organization and planning. Yes and no. The truth is that, without a well-prepared budget, businesses may be unable to set appropriate goals, measure performance, or obtain funding.
A cleanup, in this case a budget, is needed.
Where to start? For the purposes of this blog, I will focus on creating a useful annual budget. This breakdown of expected revenues and anticipated expenses is typically a month-by-month model of a business’s fiscal year. Sometimes this “base budget” is further broken down by departments or product lines.
To be effective, the budgeting process should involve all responsible department managers and executives. There must be a universal buy-in regarding the assumptions and outputs, otherwise budgeting becomes little more than a financial exercise. There is nothing more damning than to hear a budget referred to as “Peter’s budget,” or “that accounting report.” A budget should reflect everyone’s inputs and their commitments to meet clearly stated goals.
I like to build my budgets in Excel then transfer them to QuickBooks, Xero, Sage or other accounting programs; some of my clients create theirs in their accounting programs directly. Others use budgeting software programs like, Jirav, Budgyt, or Anaplan. The choices are multiple.
However prepared, budgets enable a business to accurately set goals, prioritize actions, set spending limits, and measure results. When those results are poor, budgets help management take action. To be more specific, business budget planning has these important benefits:
- Measuring Company Performance: Without a budget, how will managers know if they met or exceeded their annual goals? Performance-vs-budget reporting is a fundamental management reporting tool.
- Strategic Planning: An annual budget is the first step in preparing longer term projections and the development of a credible strategic plan. When and how should a business expand? How much money do we need? Should we acquire other businesses, partner, or sell-out?
- Obtaining Debt Financing: An annual budget is also a prerequisite for most bank or other institutional lending.
- Attracting Equity Investors: Investors are no different than banks. They want to know how their money will be spent should they invest. What is the management team promising to accomplish? A budget helps answer these questions.
- Decision Making Gauge: Over time, the accuracy of a business’s budgeting is a reflection on management’s abilities. Annual budgets that continually overreach suggest that managers have a poor understanding of their businesses and/or their own capabilities. Overly accurate budget can be interpreted as setting goals that are too easily achieved.
At Worldwide Local Connect, we help businesses with their accounting cleanups. Helping them prepare effective annual budgets is just one step in the process. Drop us a line and find out what we can do for your small business. Do it soon. Don’t leave your annual budgeting process to late December.