Leon Gettler: Creating a budget

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Creating a business budget is every bit as challenging as the work that went into last week’s Federal Budget. Every business needs a budget. The basic rule in every business is that before you even start making money, you have to know how much your costs are going to be and how you’re going to spend it. A budget helps you figure out how much money you have, how much you need to spend, and how much you need to make to meet business goals.

There’s another good reason why developing a good budget is important: if the business is applying for a loan, bankers and other financiers may want to see your budget first.
A budget will also help employees understand where the business is going and are motivated to work harder. So what are the management skills required for formulating a budget?

As I explain here, every business budget has to be done in 10 steps. First, you need a business plan. The budget is just part of that planning cycle. Secondly, it needs to be a team effort. For an SME, it needs to be done in a space of about two weeks. Any longer than that becomes a waste of time and resources. If necessary, head off to a retreat to get it done. Use the budget as an opportunity to review cost structures and see what areas need streamlining and what costs can be cut. Work with a management team to see what you can put together. Get into some scenario planning and make sure you review the budget. And finally, keep tabs on the difference between what’s in the budget and what you’re actually spending. Are things improving?

Amy Choi in BusinessWeek says it’s important to get a full understanding of expenses and sales, that is to say, the money and the stuff coming in, and look at the financials over a period of at least two years. Separate your fixed and variable expenses. Fixed items would include things like lease agreements, debt obligations and insurance, the stuff that you can’t avoid but which is always predictable. Typical variable expenses would be for personnel, marketing, raw materials, and transportation, with personnel usually being the biggest, and costs that can go up and down depending on the circumstances. And leave yourself some wiggle room to deal with unforeseen circumstances, such as fluctuating commodities prices or a big customer bankruptcy. Scenario planning would help here.

Writing for Microsoft, Jeff Wuorio outlines several steps. Most importantly, he says, you have to accept that you might miss your budgets estimates completely. After all, the budget is a best guess. The key here is to make sure that the gap between the budgeted number and the actuals are getting smaller every year. Also, make sure the budget sets up a cash cushion so that the company can withstand any unforeseen events. And monitor your cash flow because the amount of cash coming in is what will protect the business in the event of trouble.

How do you do budgets?


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