Planning for Success with Budgets

Choosing the Right Type of Budget

A budget can take on many different forms, so you have to pick the one or ones that work best for you. You can choose from several different types of budgets, including operating budgets, sales budgets, production budgets, cash budgets, and capital expenditure budgets. A budget can be as simple or complex as necessary to keep track of your company’s financials and to provide the needed information in a timely fashion.

Cashing In on Cash Budgets

A cash budget is used to plan for the anticipated sources of cash and its consequent uses of it. In other words, this type of budget consists of numbers reflecting the cash that comes in and the cash that goes out.

Comparing budgeted and actual cash receipts

Preparing a budget is one thing, but if you never look at it to see how the actual business is behaving compared to the projections, you won’t end up making the necessary adjustments or corrections for the next year or business period. You want to know why the actual amounts don’t match those that were budgeted. Is the difference minor or significant? Is someone not doing his or her job? Comparing the budgeted amounts to the actual amounts can help you gain a better idea of what’s going on with the company or organization

The quickest way to compare budgeted items with the actual amounts is to prepare your budget with adjoining columns that show each entry. You can also make separate columns for each month in a year’s budget, with the year to-date amount (the accumulated amount) in its own column.

Varying with a Flexible Budget

The term flexible budget doesn’t exactly represent the type of budget that it really is. Budgets are pretty rigid. You have set numbers that are used for goal-setting, planning, and measuring performance. A flexible budget shows the expected behavior of costs at various levels of volume. A flexible budget allows you to put a then after each if. For instance, you say: “If the volume is 100,000, then the income is $4,000,000.” Or you might say: “If the volume is at 60%, then the expenses are $40,000.” A flexible budget allows you some flexibility in a rigid world.

Budgeting Across the Months

It’s great when you can budget income or expenses week by week or month by month without having to worry about one number intruding on the next. But realistically, this ideal situation doesn’t necessarily happen in business. After all, the sales that you make during one month may not show revenue until the next month or even later. And the inventory that you amass during one time period may be predetermined by looking two or three months into the future — in other words, by looking to projected sales during that future time.

Using revenue budgets to deal with staggering income

A company may budget for a certain volume in terms of sales. In this case, the inventory needs to be available, and the product must be paid for. However, not all sales are paid for immediately. Some sales result in cash payments, but others are credit sales that come with the promise to pay within a particular time period. This is where revenue budgets come into play.

Suppose a company prepares a revenue for the first four months of the year. Historically, half of the customers pay cash (they pay upon delivery). Of the other half, 60 percent of the credit customers pay during the month in which they make their purchase. Thirty-eight percent of the credit customers pay the next month and half of those who haven’t paid in that second month finally pay two months after the purchase. The remaining sales are considered bad debts and get written off.

Last word

Making a budget is a matter of best guesses, good computations, and a bit of luck. Some differences are tolerable, but others may be too far off to be acceptable and run a good business. In order to monitor your variances without going nuts with anxiety, you can simply set a particular maximum difference or variance. That way you only have to be concerned when the difference is more than that maximum difference.

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