This week let’s discuss about How to Create, Monitor & Review a Budget & the key points that should be considered.
Now that we know what a Budget is and its benefit.
Let’s jump right into how to create one!
Creating a budget is just like gathering the ingredients for a dessert but the right amount of flavour and icing is what makes the dessert tasty and amicable similarly after creating a budget, managing and monitoring the budget is what makes a business fruitful. The budget need not be complicated all you have to do is figure out – What you are likely to earn and spend during the budgeted period!
Let’s begin by asking these questions:
1. What are the sales projection for the budget period?
– Be realistic – Overestimating it can create trouble in the future.
2. What are the direct costs?
– Costs that are incurred to make the goods or services.
3. What are the overheads or fixed costs?
Looks pretty simple right? Well you’ve just gathered the ingredients yet!
Let’s get back to the Key Steps that should be kept in mind while creating the Budget
1. Invest Time
You have to invest time to create a comprehensive and a realistic budget, it will be easier to manage and ultimately more effective when you know how your budget is accurate.
2. Last Year figures for estimating sale and costs.
Collecting historical information on sales and costs could help you while estimating your sales and costs. But Use it only as a guide.
Collecting historical information can be of help but it’s also essential to consider:
a. Your expansion plans;
b. How your resources can be used more effectively;
c. Changes in the competitive environment.
3. A realistic budget
Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.
Make sure your budgets contain enough information for you to easily monitor your company’s key drivers, such as sales, costs, and working capital.
4. Involve the right people
It’s a saying, “The right people around you are the ones that make you successful”.
Its goes the same with our business. Involve the right people to provide you with the estimates for your budget – for example, sales targets, production costs or specific project control.
When you compare their estimates to your own, you will arrive at a more realistic budget. This involvement will also give them greater commitment to meeting the budget
Now that we have completed the flavouring i.e managing our budget.
It’s time for the Icing, Yeah! You guessed it correct, The monitoring i.e we learn how to measure performances out of that budget that we have created.
So, let’s jump right into it!
But first…. Remember my friend, which I had met during my morning walk a few weeks ago?
The one whose startup was in a financial crunch because of which he was not able to buy his dream house, basically the one which led to this whole conversation of ours!
Well, he started budgeting and is still not able to get out of it, all because he failed to identify the key areas to cover while budgeting!
From my professional experience, I’ve seen many entrepreneurs who fail to introspect the significant areas that are very important to be covered while creating the budget.
Let me save you from making the same mistake!
Areas to be covered:
- Number of budgets
Startups should figure out how many budgets do they require. For e.g., if you have multiple centers, every center should have an individual budget and then a consolidated budget.
- Duration of the budget
Many startups have one overall operating budget which sets out how much money is required to run the business over the coming period – usually a year.
- Individual Budget
As your startup grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.
Stay with me…
Now, that we are aware about the areas to cover,
Let’s not waste any more time and jump back right into the Icing i.e. monitoring our budget
So, let’s quickly learn how to monitor performance using different ways:
1. KEEP YOUR BUDGET AS BASE
When you base your budget on your business plan, you will be creating a financial action plan. This can serve as:
- An indicator of the costs and revenues linked to each of your organizational activities.
- Way of providing information and supporting management decisions during the year.
- A means of monitoring and controlling your business, particularly when you analyze the differences between your actual and budgeted income or expense, particularly when you review your budgets regularly as part of your annual planning cycle.
2. BENCHMARKING PERFORMANCES
Comparing your budget year on year can be an excellent way of benchmarking your business’ performance – compare your projected figures, for example, with previous years to measure your performance.
Also compare your projected margins and growth figures to those of other companies in the same industry or across different parts of your business.
KEY PERFORMANCE INDICATOR:
To boost your business performance you need to understand and monitor the key “drivers” of your company – a driver is something that has a major significant impact on your business. There are numerous factors that influence business performance; therefore, it is critical to concentrate on a few of these and closely monitor them.
The three key drivers for most businesses are:
- Sales
- Cost
- Working capital.
The last part, here we see how to review the budget!
So, Let’s get started…
Reviewing your budget is exactly like analyzing your exam result!
As you analyze your result you figure out the subjects that are scoring for you and the subjects in which you are lagging!
Similarly when you review your budget you will figure out the areas which are helping in generating more revenue and the areas which are hindering your growth.
Timely review and correction will help usage of our budget effectively.
Reviewing a budget is a cakewalk all you have to do is consider these two main areas:
Actual Income: Each month compare your actual income with your sales budget.
How? By:
- Analyzing the reasons for any shortfall.
E.g. lower sales volumes, flat markets, underperforming products etc.
- Considering the reasons for a particularly high turnover.
E.g. whether your targets were too low, reduction in costs etc.
- Analyzing these variations will help you to set future budgets more accurately and also allow you to take action where needed.
Actual expenditure – Regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability.
How? By:
- Looking at how your fixed costs differed from your budget.
- Checking that your variable costs were in line with your budget – normally variable costs adjust in line with your sales volume.
- Analyzing any differences in the timing of your expenditure, for example by checking suppliers’ payment terms.
Well that’s all you need to look at while reviewing your budget! Simple isn’t it?
So, Is this the end of Budgeting?
Sadly, yes. At least for now.
But don’t forget to share with your Startup friends who are in midst of Budgeting.
They’ll thank you later.
Happy Budgeting!
Talk to you soon.
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