budgeting quick overview | learn financial budgets basics #Finance

one of the keys to running a successful business is its owners and managers ability to predict how the business will perform financially if you can accurately predict your firm’s performance you can be certain that you can deploy resources such as money people equipment manufacturing

plants and the like appropriately and in the most effective way a budget is nothing more than a written estimate of how an organiz ization or a particular project department or business unit will perform financially the real value in budgets comes when you compare estimates of expected performance

to actual performance when the numbers match you know that your organization or project is performing just as it should when the numbers differ markedly you know that you need to ask the question why and take a very close look at what’s going on the process of comparing EXP Ed Financial

results with actual Financial results is called variance analysis with the speed of business increasing all the time why bother doing budgets at all aren’t things changing too fast for budgets to be of any value in most cases the answer is a resounding no budgets offer the following benefits

to organizations that use them budgets are Milestones on the road to to your goals every organization has or at least should have goals budgets are quick and easy ways to see whether your organization is on track to meet its financial goals if for example you’ve already spent half your travel

budget but you’re only one quarter of the way through the year you know that you potentially have an overspending problem budgets make decisions easier when you budget a project initiative or business activity you’ll quickly have a picture of what it will cost armed with that

information you can decide whether the costs you’ll incur make good business sense or not will you make money or lose money as a result how much money for how long the answers are important elements in the decision-making process and they come from the Budgeting process

budgets can be fast a budget can be as quick and simple as a few figures scribbled onto to the back of an envelope over lunch ever heard of doing a back of the envelope projection a budget also can be a simple onepage computer spreadsheet not every budget has to weigh 10 and result in Mass

deforestation with simple budgets you can make changes quickly in near real time and print them out or email them immediately budgets can be flexible need to hire a few new employees to take care of an unexpected order no no problem a budget can accommodate the change and create an up-to-date

picture of how your organization is performing or you can simply freeze your budget to see the variance between what your budget predicted and what really happened regardless of how fast your none;">Markets are moving you can always keep up no matter where you are budgets are fun okay maybe we’re stretching things just a bit here but honestly creating a budget in which the actual results match your expectations is a real thrill the only bigger Thrill is when your results are

even better than you expected remember whereas extensive long range strategic planning seems increasingly less valuable to most organizations today near-term tactical planning is becoming incredibly valuable budgets are a very necessary part of the Tactical planning process now that we’ve

sold you on the value of doing budgets you are sold right this section looks at some of the most common kinds as well as how to create and use a budget when it comes right down to it you can budget any activity that has a financial impact on your organization want to budget a self-managing work

team no problem a research and development project piece of cake the new headquarters construction job all in a day’s work the following list presents some of the most common budgets used in business today cash budget an estimate of a company’s cash position for a particular period of

time by using your current cash position as a baseline you can estimate all cash inflows sales and outflows expenses during the time period you specify say a month to determine a projected cash position at the end of the period operating budget shows a business’s forecasted

Revenues along with forecasted expenses usually for a period of one year or less the operating budget is a top level budget the budgets that follow on this list are line items in that operating budget Labor budget takes every person in an organization department or project and

multiplies the number of hours they’re expected to work by their wage rates the result is the total labor cost to be expended for a set period of time sales budget an estimate of the quantity of goods and services that you’ll sell during a specific period of time in the case of products

you estimate total Revenue by multiplying the total number of units projected to be sold by the price per unit production budget starts with the sales budget and its estimates of the total total number of units projected to be sold the production budget then translates this

information into estimates of the cost of labor material and other expenses required to produce the units expense budget every business from a oneperson home business to a huge multinational corporation incurs a variety of expenses during the course of normal operations you prepare expense budgets

for travel utilities office supplies telephone and many other common and not so common expenses Capital budget if you plan to buy fixed Assets with long useful lifespans many organizations consider this to mean a year or more the Capital budget is

the place to budget for them items in your Capital budget may include buildings production Machinery computers copers furniture and anything else that will still be in your office long after you’re gone what’s the best kind of budget the one that works there are many

different types of budgets and three key approaches to developing a budget bottom up top down and zerob based each approach has its advantages and disadvantages and each approach can work well although the pendulum is clearly swinging in favor of the bottomup approach bottom up in bottomup

Budgeting supervisors and middle managers prepare the budgets and then forward them up the chain of command for review and approval middle managers have the benefit of a close working knowledge of the organization and its financial performance as a result bottomup budgets tend to

be more accurate than top- down budgets in addition bottomup budgets can have a positive impact on employee morale because employees assume an active role in providing Financial input to the Budgeting process top down in this approach top management prepares the budgets and imposes

them on the lower layers of the organization generally without any consultation or involvement on the part of those outside of top management top-down budgets clearly Express the performance goals and expectations of top management these budgets however can be unrealistic because they don’t

incorporate the input of the very people who will Implement them zerob based Budgeting the process in which each manager prepares estimates of his or her proposed expenses for a specific period of time as though they were being performed for the first time in other words each

budgeted activity starts from a budget base of Zero by starting from scratch at each budget cycle managers must take a close look at all their expenses and justify them to top management thereby at least in theory minimizing waste budgets provide a kind of early warning system that when compared to

actual results can inform you when something is going wrong and needs your immediate attention when your expenditures exceed your budget you can do several things to get back on track review your budget sometimes it’s the budget not the spending that’s out of line before you do anything

else take a close look at your budget to make sure that the assumptions on which it’s based are accurate and make sense in your changing Market if your Market is growing quickly you may need to adjust your estimates freeze spending one of the quickest and most effective ways to bring spending

back in line with a budget is to freeze spending for example you can freeze expenses such as pay raises new staff and bonuses postpone new projects new projects including new product development acquisition of new facilities and research and development can eat up a lot of money if spending is over

budget a common solution is to postpone new projects until you have enough Revenue to support them be sure to carefully balance your desire to bring spending back in line against the need to develop new products and services if you’re too zealous in this area the result can

be disastrous for the future growth and prosperity of your company ask your employees for help here’s an old but very wise saying none of us is as smart as all of us if your expenditures are exceeding your budget and you can’t sort it out on your own ask your employees to suggest ideas

for getting back into the black chances are someone in your organization has some ideas you hadn’t considered and and these ideas may make the difference between sinking and swimming lay off employees and close facilities when you’re trying to cut expenses The Last Resort is to lay off

employees and close facilities although these actions will result in an immediate and Lasting decrease in expenses you’ll also face an immediate and Lasting decrease in the talent available to your organization in addition the morale of employees who Sur survive the budget acts can and likely

will suffer at least for a while