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At Doeren Mayhew, we often find that the idea of operating within a budget is foreign to many closely held businesses. But developing a budget for your business is a proactive way to take control of where it is headed. Working under a budget gives you one of the most effective management tools of all – a benchmark that you can use month by month to check your progress toward business goals. Here are four signs your business may need to develop a budget or adjust your budgeting process to make it more effective:
The benefit of budgeting and control over profit is best illustrated in a recent client example. While helping a construction services client develop a budget for his business, we realized the business would be tracking to net only 2 percent in profits, while the target for its industry was 15 percent. Having this proactive forecast of the year ahead allowed us to make the appropriate revisions to keep the business on track with its profitability goals.
In its simplest form, a budget can be described as a business plan translated into numbers. Since spending should align with business goals, the budget helps your team see the strategic direction of the business and make decisions that support it. As you budget, a whole series of planning decisions cascade out as you think about how to reach goals: Is extra inventory required? Will you need to add more employees or move to bigger premises? Will you need to put more resources into marketing?
The fact is, businesses that don’t operate to a budget are unlikely to grow, and if they do, they risk losing some control over growth-related fixed costs. If your aim is business growth, the starting point is to build a sound estimate of costs and the sales revenue necessary to cover those costs and still reach the desired profit. Monitoring sales projections will alert you to variances so you can fix them and stay on track toward goals. If some expenses are higher than you expected, do you need to look for ways to cut them, or did sales increase more than was expected and so there is a corresponding increase in variable costs? If sales aren’t on track, what has happened to cause the difference and how can you improve sales volume? Or would it be more realistic to accept they will remain low and trim future costs to match?
4. You’re concerned about the opportunity for fraud or theft, or had a recent incident of it.
Monitored on a month-by-month basis, a budget can serve as an internal control tool, alerting you to discrepancies. In addition, when employees are aware that expenses are being monitored, it can serve as a deterrent. In closing, budget variances can be either warning signs or opportunity signals, and the information they provide should be used constructively to decide where changes need to be made in operations to reach your budget goals.
Doeren Mayhew’s Troy, Houston and Ft. Lauderdale CPAs and advisors guide businesses through the budgetingprocess, facilitate strategic planning, offer CFO support and more. For more information, contact us.
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