Between strategic forecasting needed for long term planning and detailed review for auditing and taxes lies a neglected need for small business: budgeting.
Preparing a budget is not difficult, and an excellent managment tool for monitoring monthly income and expenses, identifying problem areas early, and improving your bottom line. There are four basic steps to prepare a budget:
1. Prepare a detailed "chart of accounts". This will help you track your budget variances to specific accounts.
2. Identify a method to esimate each income and expense account. An easy and accurate method is to base your next year's estimates from your actual results from the current year and last year. You could also base your estimates on information from suppliers or from an overall industry average. (Industry averages are derived from the Robert Morris Associates book which gives updated industry averages for all categories of your financial statement data).
3. Prepare a budget. Assemble the estimated information into a 12-month budget. Make sure you prepare it with your heavy sales and slow sales month fluctuations in mind.
4. Monitor and adjust your budget. Nobody can oversee everything and deviations from your expectations will naturally occur. Monitor your actual performance against what you had expected and adjust your budget accordingly.
With a budget in place, you will have a much better picture of your business, and your cash flow will be monitored much better, resulting in a more balanced financial status.
Copyright Jeanine Pfeiffer