As a new year begins, so do many of us undertake resolutions and goals for 2015, whether it’s to spend more time with our children or drop a few pounds. And just like people, businesses need a plan in order to improve and reach those goals. For a business this plan usually takes the form of a budget.
For some business owners, setting a budget is not always a top priority. Often this is because they have no mechanism for guessing what will happen with their company in the coming year. So creating a scenario that takes a stab at predicting the year’s outcome is not seen as very important.
As financial advisors, we here at Sponsel CPA Group disagree with this mindset.
A budget can take many forms, from something basic that serves as a measure for whether the business is performing as expected to a more exact estimate of performance used in setting key metrics for incentives and performance bonuses. A budget can also encompass both an estimate of financial performance (an income statement) and financial position (a balance sheet).
At its most basic level, a budget is a simple comparison of the upcoming year to the prior year. If everything goes as planned, then the results should be much the same. If you begin with the prior year as the starting point, you can then modify its actual results for things you know will change in the coming year.
For instance, let’s say the business has won over a new client and that account should generate an additional $50,000 in revenues for 2015. The simple modification to the 2014 revenue amount would be an increase of $50,000, assuming everything else is expected to remain status quo.
With the additional revenues, you can then begin to estimate the additional costs that will be incurred to generate these additional revenues. Product costs, salaries and other overhead items can easily be projected from other customer relationships and then used with this new customer revenue to arrive at the expected profitability associated with the new account.
This basic example can be leveraged across different lines of revenue and expenses to generate a new expectation for the coming year’s profit.
An additional benefit of budgeting is the potential to predict cash flow patterns for the coming year. By building a balance sheet with a budgeted income statement, a business owner can visualize how cash may be generated and used over the course of the year. This exercise can be very helpful in planning for capital expenditure needs and debt service obligations that should be part of the budget but do not manifest themselves in an income statement.
If you are interested in the budgeting process or want to learn how a budget can help your business, we would be happy to discuss how we can assist you. Please call Jason Thompson at (317) 608-6694 or email [email protected].