While the term may instigate visions of restraint and cost-cutting, a budget is vital for success so you know where you're going and how you're going to get there. Effective budgeting tools help you predict future earnings and costs as accurately as possible and set up back-up plans, create guidelines for spending and steer you towards profitability.
In a small business, you may hold the final say in how money is spent and allocated. If you have only a few employees, you don't need to chart the flow of decision-making. Corporations, however, rely on the organization chart to give each department head responsibility for predicting costs and profits for his area of expertise. At the top of the chart sit the senior executives and the board of directors who ultimately hold the final decision-making power. The leaders of a corporation have an overview of the entire company and use that view to make sure those further down in the corporate structure create budgets that serve the whole company. A top-down organizational chart usually includes a master budget over which the leaders exert control.
Global economic factors are difficult to predict and may affect the results of your budget planning. To compensate for unexpected market changes, a corporation may initiate rolling forecast tools that are reviewed quarterly. According to consultants at Sterling Hoffman, using rolling forecasts as a primary budgeting tool involves both top-down and bottom-up budgeting that reviews progress as it unfolds. Time spent on developing a budget is reduced when each budget line item is specific and easily accessible. Operations remain fluid and flexible to meet market demands.
Sales drive the organization's future success. At the same time, a wide range of factors affects sales. An effective sales spreadsheet for budgeting purposes includes goals and projections, cost of production and distribution and availability of raw materials and resources. You can base predictions on past performance rates of your sales staff and include projections and quotas for them to reach. All labor costs associated with each sale should be included in the spreadsheet to achieve realistic profit projections. Spreadsheets can easily be accessed throughout the year and updates calculated accurately to reflect progress.
Analysis of the accuracy of past budgets helps corporate budget makers see where they overreached and where they hit intended targets. An accurate analysis starts three or four months before the end of the year when you prepare budgets for the upcoming year. Analyzing current trends and incorporating trend forecasts gives you a practical picture on which to base future predictions. A thorough analysis utilizes computer modules that show costs and profits and includes significant communication between managers, marketing staff, accountants and compliance officers and chief executives.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."