Whatever line of business you're in, your chances of success will increase greatly if you have a solid grasp of your financial position at all times, and that relies on good budgeting.
A well-planned and accurate budget will help any company survive and thrive in various ways, unlocking benefits such as:
- Understanding your debt obligations so you can avoid the risks of late payment
- Better financial planning based on a clearer picture of your cash flow
- Knowing when’s the right time to make big decisions such as taking on more staff, expanding your product offering or opening new lines of credit
If your budgeting process has been examined and found wanting, here are five actions that can help you improve it:
1. Review your current approach
One of the most productive steps you can take to optimize your budget is by looking at the way you're doing it right now, and asking where your methods fall short and need to be updated.
Consider whether your current approach is increasing your exposure to some of the most common problems and challenges in business budgeting, such as:
- Working with inaccurate or out-of-date data
- Failing to revise your budget throughout the fiscal year in line with developments in the business or the wider industry
- Focusing so much on figures and financial indicators that you overlook the less tangible (but no less important) factors in business performance, such as employee engagement and satisfaction
Once you have a good picture of how your budgeting process already works and how you want to refine it, you can move forward with a clearer purpose.
2. Decide how you want to budget
There are different ways to budget, so there are some important decisions to be made about how you want to approach the process.
Generally accepted accounting principles require that financial information is reported on an accrual basis, which means you have to report revenue in the period when it's earned, not when cash is paid. It can therefore be beneficial to keep a full accrual budget, which will give you a detailed picture of your income.
However, some businesses also find it useful to budget for cash flow. This can help you keep track of all cash coming into and going out of the company, as revenues and expenses are only recorded as the cash is exchanged, not when they’re earned or in the period they benefit. A cash budget is a useful tool for understanding your liquidity.
3. Think carefully about the people involved
Like most commercial activities, budgeting is a people-driven process. The individuals involved will be instrumental in how this aspect of the business functions and the results you gain from it.
One pitfall to avoid is entrusting the creation and management of your budget to just one person. Instead, build a team of employees and stakeholders who can provide the insights you need to plan and forecast effectively.
It's advisable to involve members of your procurement team in budgeting, since they can give you a holistic view of the costs involved in keeping the company running.
4. Prepare for the unknown
A good budget should provide a realistic, pragmatic picture of your financial position, which means including a certain amount of flexibility to allow for unforeseen events or economic difficulties.
Adversity of some kind is inevitable, so your budgeting process should always account for it, even at times when you're doing well and the economy seems healthy.
The COVID-19 pandemic is a powerful example of an event that can arrive out of nowhere and have an enormous impact on industries and individual businesses. Companies that budgeted carefully and gave themselves a financial cushion against unexpected challenges will have been the best-placed to cope with this crisis.
5. Make your budgeting quicker and more responsive
Industry conditions and business performance can shift considerably over the course of a financial year, so it's important that your budgeting process is flexible and agile enough to account for this. Get into the habit of amending your budget throughout the year, to keep it as accurate and relevant as possible.
It can also prove beneficial to consider how automation, specialist software and other technologies can make your budgeting quicker and more efficient.
If the process is too cumbersome and time-consuming, you could find that by the time you finish work on your budget, it's already out of date.
Further reading:
- How to Plan and Forecast with Total Confidence
- Overcome Budget Challenges: How CFOs Can Master Budgetary Control
- Budget Forecasting: 4 Techniques You Could Be Using
- Direct vs. Indirect: Which Cash Flow Method is Better?
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