Budget Time For Your Budget
The goal of any enterprise is to earn more than it spends. One of the most effective ways to accomplish this goal is to establish a budget, a tool which estimates the revenue and expenses expected to be earned and incurred in a given period. With the 4th quarter in full swing for calendar year entities, now is the opportune time to create or fine tune your 2022 budget.
Defining a Budget
A budget enables a company to determine if it has sufficient revenue to cover its expenses; if it will generate enough cash flow to service debt; or even if certain desired ratios or key performance indicators will be met. A company can then utilize its budget to make important decisions surrounding personnel, capital expenditures and other means of establishing growth. Despite its overall utility to a company, budgeting can sometimes be deprioritized in favor of other tasks and functions. However, budgeting is crucial to facilitating growth and accomplishing goals, as it aids a company in understanding what it spends and how that spending is financed.
Revenues and Expenses
A budget should estimate revenues and both fixed and variable expenses on a monthly basis. These preliminary numbers can be based on various inputs and assumptions. Often, historical data and trends are the perfect foundation for the following year’s budget as, barring significant changes, a company can expect its costs will approximate prior figures. From there, changes to revenues and costs known at the time the budget is created can be programmed in, as can goals associated with revenues and expenses.
In addition to tracking expenses, a company can use a budget to see what revenue or expense levels need to be met to achieve certain objectives, whether related to profitability, key performance indicators or expansion.
For revenues, work already on the books or expected to be obtained can be estimated per contractual terms. Fixed costs, such as rent or insurance, can be locked in at set rates for each month. Payroll, which is typically fixed but can have a variable component, can be projected based on rates, expected hours and salaries set prior to the new year. Variable overhead expenses, though subject to change on a monthly basis, can be projected monthly based on the expected annual cost. Direct costs, which are those related directly to the generation of revenue, can be estimated based on the projected gross profit: if revenue is budgeted at $250,000 in January and the expected gross profit is 10%, direct costs would equal $225,000.
Review Budget Monthly
The budget should be reviewed monthly with a focus on addressing significant swings – both positive and negative – in budgeted vs. actual results. This level of intel can help decision making in the future and allows a company to address issues before it is too late.
By reviewing these results on a monthly basis, a company will gain an increased understanding of its business practices and can potentially uncover inefficiencies to rectify. All of this is done with the goal in mind of confidently charting a course forward.
Modify Budget When New Information is Known
Overall, budgeting is an ongoing process as opposed to a one-time exercise. Business activity typically ebbs and flows – even the best companies experience the unexpected. While it is crucial to establish a base or foundation budget prior to entering the year, the budget can be modified as new information becomes available – new jobs or projects, additional expenditures or even updated goals or cash flow requirements. Budgets help businesses navigate uncertainty to help make any situation manageable.
At Wouch Maloney, we have vast experience in helping companies create, interpret and manage their budgets to achieve desired goals. Please contact us with questions or for a consultation on your existing budget or for assistance in creating your initial budget.
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