The time has come once again to begin the planning and budgeting process for the upcoming year. An accurate budget does more than help maintain your company’s profitability. It also helps you set prices, plan for growth and increase efficiency.
Yet despite the importance and the benefits of the budgeting process, many people put this task off. Some people say it takes too long, or that by the time they complete a budget it’s out of date. Others say that their budget doesn’t match the objectives to which they’re held accountable.
There are more, but you get the idea. The thing is, an ineffective (or worse, nonexistent) budget can have disastrous results, including:
- Cash flow crisis
- Inability to respond to changes in the market
- Too much inventory on hand
- Inability to raise funding due to inaccurate financial projections
As with any large endeavor, breaking the budgeting process down into steps can help you get past your reluctance.
Step 1: Make a Strategic Plan
It is important to align budgeting goals with your strategic goals. This will help management better measure your progress. If you don’t think these goals can be translated into a budget, consider working with your company’s leadership or a consultant. They can help your team develop specific budget and planning goals.
Structure your budget with enough detail to track the information needed to measure and manage. As part of this process, meet with all departments and discuss what financial information is important to them and would help them do their job better.
Step 2: Evaluate Your Inputs
Analyze your budget inputs, which include:
- Prior year actual financial results
- Capital needs
- Impact of changes in the industry and/or economy
- Current backlog
- Personnel levels versus capacity
- Changes in the costs of materials and other supplies
When evaluating revenue, direct costs and overhead costs, consider any factors that may either increase or decrease these items. Your prior year actual financial results can provide a template to work from and show where your old budget fell short. This helps you make more accurate predictions for the upcoming year.
Step 3: Make Tweaks
After preparing your initial budget, evaluate results regularly and adjust accordingly. For example, if your overhead percentage is high, you might consider taking steps to improve your production process. You could also adjust the selling price of your products. Doing so can bring in more revenue to cover high overhead costs.
Regular adjustments should be part of your process. Make sure to schedule this time so that it doesn’t fall by the wayside.
Step 4: Plan for Contingencies
Be prepared for unexpected capital needs or other budget shortfalls. Building this into your company budget is just as important as a rainy day fund is to your personal finances.
Step 5: Dealing with Budget Variances and Monitoring
The budget can be a living and breathing monitoring tool. It shows where shortfalls were not anticipated, and it identifies problem areas that need to be addressed. To get the most accurate picture of your company’s budget, make changes as the year progresses.
You don’t have to be an accountant to set up your budget. By following these steps, you can set your company on a path to financial success. Our manufacturing CPAs are happy to guide you in the budgeting and planning process. We know the unique areas of concern you face and how to best parlay them into a profitable new year!
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