Every business needs to keep track of all income and expenses, as it is essential to assess the business’s performance and is a legal requirement for taxation and compliance purposes. Tracking your finances looks at a business’s historical performance, but what about the future? How can a business predict (or at least attempt to predict) where the company will go? What will future performance look like?
Each business has some level of recurring costs that are required to keep the business going. Think about salaries, software subscriptions, rent, storage, etc. Budgeting’s purpose is to define how your business will cover these costs – and make a profit on top of it.
Budgeting is allocating your future finances into appropriate categories. It is a combined statement detailing planned income, expenses, and cash flow for a future period (mostly a year). Some businesses also add a budget to their balance sheet and should be included if it will add value to decision-making.
All functioning businesses should have a budget set up. It is a useful tool to guide the entire business throughout the year (or whatever period is most relevant). It gives a clear idea of what income should be achieved and how it will be used. Nobody can predict future performance with 100% accuracy, but having a budget gives direction to the business’s decision-makers.
Forecasting entails running different scenarios in order to predict future performance, which is mostly determined based on historical performance and trends. There are various other methods for effective forecasting and are highly dependent on the business model and future strategic plans.
A budget should include forecasting that is aligned with the company’s goal and strategy. If part of the strategy involves a new project or venture, there won’t be any historical figures to use as a starting point. In this case, the forecasting is performed on other methods requiring a clear understanding of the business and the new venture or project.
Budgeting is an excellent way to understand what truly drives your business (or new venture). It forces you to ask the questions: What aspects affect income? Do we have an effective sales process? Are we exposed to fluctuating prices? How could we react to changing prices? How protected is our income?
The above questions (and so much more) are automatically asked when a budget is prepared, especially when done properly. Budgeting and forecasting involve a lot of assumptions which each business aims to get as accurate as humanly possible. Each line item needs to be scrutinized and understood in order to deliver an accurate budget.
Usually, many departments and teams are involved with the budgeting process, as each department or team has their inputs into the business, which needs to be included in the overall budget. This can be a tedious and lengthy process but is needed for every business that wants to reach the next level.
If running a business was easy, everybody would be doing it. Budgeting is only one aspect of running a successful business. The truth is that most business owners face a wide range of challenges every day and struggle to find the time for an effective budgeting process. If this rings true for you, why not get some help? Why not partner with an experienced financial professional?
At Vos Accounting, we can help you develop a detailed financial budget, clearly showing where your business is going. But most importantly, allowing you time to focus on what is important: Running your business.
Please contact Vos Accounting & Tax if you’d like to take your business to the next level and partner with someone who’ll provide the support you need.