Most of us grew up receiving long lectures from our parents about the importance of budgeting and saving money. But how many of us were actually taught to prepare and properly adjust a budget to our financial needs?
Maintaining a budget and managing your cash responsibly are key factors in both personal and professional success. Let’s explore these further.
Preparing a Budget
A budget is defined as an estimate of income and expenses over a certain period of time. Individuals and organizations typically implement budgets to help guide their financial decisions toward achieving a certain goal.
It is crucial to note that budgets are fluid. They should be reevaluated regularly based on changing income and expenditures. While evaluating your budget, ensure that it is helpful in progressing toward the desired goal and adjust accordingly.
How can you prepare a budget that helps you meet your financial goals? To start, the amounts that make up the budget should be based on prior period financial information and realistic estimates of future expenses.
Other ways to prepare an effective budget include:
- Reviewing prior period and current period information
- Comparing current period performance to existing budget (if applicable)
- Properly estimating upcoming revenues and expenses. To do this, follow these steps:
- Identify trends in revenues and expenses (ex: is one account increasing or decreasing year over year?)
- Increase prior year expenses by a certain percentage
- Annualize current year expenses (and, if needed, increase by a percentage)
- Consider which programs will continue and determine the necessary funding to sustain them
- Predict increases and decreases in certain expenses for a specific reason
Maintaining a Budget
Once a budget is prepared, it is important to review actual performance to your budget and identify variances.
While large differences can occur due to unforeseen circumstances, they can also identify mismanagement of assets or incorrect coding. Reviewing these red flags as you observe them is crucial, since a small issue can quickly develop into a larger problem if ignored. Correcting the mistake will likely become more complicated the longer the problem exists.
It is also important to note that earning less revenue and/or spending more than your budget allows will create a large deficit variance compared to your budget. Alternatively, a surplus occurs if you earn more revenue and spend less money than your budget accounts for.
How can you keep your budget and performance consistent to prevent deficits? This is where cash management comes in.
An organization’s budget should align with its cash management policies and practices. Cash management focuses on the collection, handling and usage of cash.
Factors to consider in cash management include:
- How does your organization account for or track all money coming in?
- Which internal controls exist regarding cash deposits and cash disbursements?
- Who has the authority to draw on bank funds?
- Who approves expenses and when they are paid?
Generally, what an organization predicts it will earn and spend monetarily should match up with its revenue and expenses. All members of the organization need to be accountable for their portions or line items of the budget.
If staff members notice that their accounts are significantly over or under budget, then corrective action should be taken to mitigate unfavorable variances. While it is possible to adjust the budget, reducing expenses or developing new revenue streams might be necessary to stay on budget. If the budget is used as a tool for strategic growth purposes, comparing actual results to budget will assist the organization in benchmarking its actual performance or success to the intended levels.
Still confused about creating a budget that is right for you or your company? Reach out to the knowledgeable outsourcing professionals at Halt, Buzas & Powell through our contact page or by calling 703-836-1350. We are always happy to assist you!
Written by Robert Roudik, CPA, CFE; Outsourced Accounting Supervisor.