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Developing a business budget 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. So how should you be monitoring your budget each month? Read below for components to watch.
Starting At the Bottom – the Income Statement
Generally, a business budget will have three primary components: an income statement, a cash-flow statement and a balance sheet.
The income statement typically shows sales, margins, operating expenses and profits or losses. And because, like many business owners, you may naturally be drawn to the profit part — otherwise known as the bottom line — let’s start there.
The key details to focus on here are, obviously enough, whether you’re operating profitably. If so, determine what you did right during the month and whether you should pursue these actions more aggressively or take a “hold steady” approach.
If your month didn’t go as well as anticipated, ask a similar question: Should you actively try to pull your business out of its current financial predicament or should you dig in and wait it out by staying within your margins and controlling operating expenses?
Getting Into the Flow – the Cash-Flow Statement
Next, examine your cash-flow statement, which typically consists of three sections:
After looking carefully at all three sections, check to see whether you have as much available cash as you expected . A number of things may have thrown off your earlier projections.
For starters, there’s the question of taxes. Often, businesses hold funds allocated for income and other taxes for an interim period until a payment is made to the appropriate governmental body. If these funds aren’t clearly marked as such, you may overestimate available cash.
Have you made any major asset purchases? If so, such a transaction could have major implications on whether or not you’ve stayed within budget. Maybe you absolutely had to buy a new piece of equipment after the old one failed, or you had to allocate amounts due from customers toward purchases before those funds were actually collected.
Another important thing to look at is spending variances. When departments over- or underspend against budget goals, the reasons often go unchecked.
Putting It All Together – the Balance Sheet
As mentioned, the third element of a business budget is the balance sheet. After looking at your company’s profitability and its cash flow, use this document to get a sense of the financial condition of your business to date.
For instance, perhaps you’re seeing substantially more debt on your balance sheet than you anticipated. In this case, you’ll likely need to curtail discretionary expenses (such as bonuses) in your budget and create a plan for paying off or refinancing that debt as quickly as is reasonably possible.
When delving deep into the numbers, however, don’t lose sight of your company’s goals. If a particular item on your budget never really “paid into” your business objectives for the year, maybe it’s time to eliminate it. On the other hand, if an item is delivering significant value — especially in comparison to cost — figure out why. Could you get even more from it by raising the activity’s allocated dollars, or is it fine as is?
Perhaps the easiest way to get a sense of whether your budget is serving its purpose is to dig out your business plan. Sometimes business budgeting monitoring may prompt a revision of either your mission statement or business plan (or both). But undertake any such change with caution, as drastically altering your company’s chosen course can be a risky maneuver.
Doeren Mayhew’s business advisors guide clients through the strategic planning and business budget processes. For more information or assistance, contact our advisors in Michigan, Houston or Ft. Lauderdale.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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