Since all costs and impacting factors can’t be known, all budgets have to deal with the unexpected to some degree.
A budget is of critical importance to a business because it plays a vital part in driving its financial future. However, preparing budgets seems to a complex exercise for most business owners since they need to accurately predict the future in an environment that is always changing at short notice. Considering the enormous impact of the budget on the operations and profitability of the business, business owners need to know how to develop and implement an effective budget. Some useful tips from Michael Giannulis:
Understand Why You Need a Budget
A budget is not another name for accounting for the income and expenses of the business. Even though you do use it to monitor your financial operations, it is a tool with which you can improve your financial decisions. Having the right attitude is important while putting together the budget. You need to have a positive attitude and view it as a useful business tool rather than something that acts as a hurdle to free decision-making. If you are unsure, ask your financial advisor which type of budget you should be developing because one way is to do it on a net accrual of income while another way is to do it on a cash basis. Everyone must know the goals and objectives of the budget.
Get Together a Competent Budgeting Team, Advises Mike Giannulis
A budget should never be created by one person and thrust down the throats of all the employees. Rather, the top management should put together a team comprising members from all operational areas who will be accountable for implementing the budget as well as a few other people whose perspectives can help the creation of a more practical budget. However, refrain from having too large a budget team as you are likely to get bogged down in too many arguments.
Make Your Budget Realistic
Even though everyone knows that the purpose of the budget is to set targets for financial performance, it is vital that the budget is not only practical but also achievable, says Michael Giannulis. If the budget is too ambitious and not rooted in reality, employees will tend to dismiss it as unattainable and not try to up their game. The best way of constructing a practical budget is to base it on past performance and an estimate of the direction in which the market is likely to move. Using the performance figures of the previous five years is likely to give you a better idea in comparison to using only the data of the previous year.
All budgets need to factor in some unknown elements and deal with things that have not been factored in as they were either not known or ignored earlier. Since all costs and impacting factors can’t be known, all budgets have to deal with the unexpected to some degree. Even when you are preparing a budget when the market demand for your business is strong, you should never assume that you will be permanently on a roll. Making overly optimistic budgets can lead to disappointment and incorrect financial decisions.