Many business owners who create an annual budget of expected income and expenses rarely give it much thought once complete. But a sound, carefully reasoned and--most crucial of all--flexible budget is required in order to serve as a powerful road map to achieving your company's strategic goals. Here are some steps you can take to make sure that your budget remains useful throughout the year.
Set Your Sights
The best budgets provide stretch goals for you, your managers and your employees to aim for, while providing a cash cushion to mitigate risk. But these budgets aren't much good if you don't have a clear vision of where your company is headed. As you prepare your budget for the next 12 months, keep in mind where you want to be in five years. Will you be expanding into new markets? Preparing for an exit? Or facing a potential economic downturn? These will affect how you deploy your resources.
Do Your Research
To make sure your budget is grounded in reality, base it on past performance--but don't stop there. Try to weed out any anomalies that may have influenced the prior period's results, such as a large project that generated once-off income. If you anticipate growth, be clear as to where it will come from. An additional investment in marketing or new sales hires will require resource allocation. Keep an eye on upcoming financial and market predictions, and consult with those--particularly your front-line employees--who are closest to your customers.
Communicate with Employees
Once you've established a budget with as much input as reasonably possible, it's crucial to make sure that everyone in the organization understands their part in it. It's not enough to simply tell everyone, "We need sales to increase 5 percent in the next year." You must also communicate how you intend to get that done--and how everyone can help.
Compare Assumptions to Actuals
At the end of each month or quarter, compare your financial forecasts to actual performance. Where are the discrepancies, and why did they occur? If a particular expense is higher than expected, for instance, should you address it or will it have to be rolled into the following period's budget?
Revise as Necessary
Information is useful only if you use it. If your budget was off for the month or quarter, that doesn't mean you should dismiss it as being wrong. As you dig into the numbers and uncover why you were unable to predict performance, you might unearth leading indicators that can help you prepare for the future. In the meantime, arm yourself for the coming period by revisiting the budget and adjusting it based on current circumstances.
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