Whether in business or at home, the budget is a powerful financial tool. Simply put, it's a plan that you make for yourself or for your business that decides how much you can spend based on your earnings. Those who aren't familiar with budgeting may find the process itself a bit dry or overwhelming; however, mastering it is an essential skill, regardless of industry, and those who are successful command respect.
The Planning Phase
Businesses typically plan their budgets on an annual basis. A budget year may begin at any time -- it doesn't have to be January 1 -- and the planning process begins well before then. Usually, serious budget planning begins roughly 3 to 4 months ahead of the new budget's start date. At this point, the manager reviews his current income and expenditures, and predicts what will occur the following year. For example, if the business is beginning a lucrative new contract, the manager can reasonably anticipate a rise in earnings; alternatively, if business is declining, the manager can assume that revenue will fall. Once he has this information, he can adjust his expenditures accordingly.
The Budgeting Phase
During the budgeting phase, the budget's first draft as completed during the planning phase is reviewed. In large companies, top management will review each unit's budget and make changes. Smaller companies may only have one unit, but still must review the initial draft to make changes as required. During the budgeting phase, it's quite common for management to send back first drafts for revision, at which point the budget's manager must revise as directed. This revision process can be quite lengthy, as managers debate among one another; the budget is the financial tool that is the means to accomplish the company's goal, and each manager may take personally how much money they get to try to achieve the part of that goal for which he is responsible.
The Implementation Phase
The implementation phase begins when the final budget is approved. Businesses that use budgeting software then must "load" the budget into the software. It sounds easy enough, but it can be technically challenging. Managers must take care to review the results after the budget is loaded. Smaller companies that don't use budget software packages can simply add the data into a spreadsheet for ease of use. When the new financial year begins, the manager begins tracking revenue and expenses against what he planned.
Adjusting the Budget
While budgets are set in stone after approval, managers often change their expectations as new information becomes available to them. These changes are reflected in the forecast. The forecast doesn't change the original budget -- that never changes -- but it does provide a new target that managers must meet. Managers must frequently perform analyses that compare the actual revenues and expenditures against the original budget and the updated forecast. The analyses explain why the variances occurred, and provide backup for the forecast. While it may be tempting to purposely underestimate revenues to "blow out" the goal, that's unwise. When budgeting, accuracy is the order of the day.
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