Budgets matter to business

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Business owners striving to survive the tough economy need to know how cash flows in and out of their business.
A good place to start is with a budget – a basic tool used to forecast when cash will be collected and when expenses must be paid.
Many business owners don’t take the time to create a budget, or they neglect to update the one they have.
In this slow economic recovery, it’s more important than ever to know where money is going.
Financial institutions also want to know; banks often require that borrowers include a budget with their loan requests.
Understanding how to create a business budget is vital to improving a business’s chance of survival.
A good budget has six key components.
Current description of the business and its market: Describe the economic factors affecting the business and its cash flow.
Include how sales are recorded and collected (cash, credit card) and the estimated length of time between billing and collection.
The same details should address how bills are normally paid. Business activities fluctuate and this section should reflect precisely what is being done now.
Explanation of how the budget supports the company’s mission, vision, values and goals. Budget items should support the company’s overall objectives.
Items that don’t correspond to goals should be questioned. If a company doesn’t already have a mission statement, this is a good time to compose one.
This step ensures money isn’t being spent inappropriately.
Line-items that describe and account for allocated funds: Typical examples include staff and payroll; real estate, including rents and utilities; equipment needs; and production materials.
Costs should be split between fixed expenses – those such as rent that continue whether or not sales are made – and variable that fluctuate with production or sales levels.
Although it can be tedious to maintain a detailed budget for all company expenditures, the extra work provides essential information to manage cash flow.
The budget can track expenses and guide spending decisions.
Performance expectations: A budget is useful for analysis only if it is updated regularly to accurately reflect actual spending.
Items that may have been under- or over-budgeted, and thus caused cash to deviate from projections, can be analyzed and controlled in the future.
Supporting appendices: These may include historical budgets and their corresponding results analyses, departmental documents, cost trends and market projections.  
Supporting documents should provide a record of why decisions were made and whether estimates were based on the prior year’s expenditures or forecasted market conditions.
Executive summary: This section condenses all of the information in the budget and provides practical “takeaway” information.
More important, the executive summary can make the budget more digestible to lenders and outside investors.

Bobbi Hayes
Accounting & Consulting Group, LLP