Owners need budgets to plan, spend, and scale accordingly.
Simply put; your business needs a budget analysis. How often? That depends. Budgets are used to determine the financial condition of a business. So, if you need to identify your cash flow, the overall condition of the company, or to plan for the future, you need one now.
Given all the time and effort that budgeting takes, we’ve outlined everything you need to know about them below.
What Numbers are Needed?
To develop a strong budget, you’ll need to look at your operating activities and compare them to projections. These numbers don’t necessarily need to be for the whole year. Rather, an analysis can be used to project monthly, quarterly, or yearly goals.
Regardless, gather all the company’s financial data and forecasts as well as comparable industry info to see where it stands.
What Reports Should Be Run?
The first analysis you should look into creating is a profit report (or a budgeted income statement). This report will give you a generalized overview of your profits and losses. It should also separate variable and fixed expenses so you can clearly see where money is going. Essentially, this tells owners what areas need to be worked on to improve profit.
The second type of report that your business will likely need is a budgeted balance sheet. This report provides a sale to expense ratio which identifies assets and liabilities. Knowing where your assets and liabilities are will empower you to better plan for operating costs, unforeseen changes, and cash flow.
The third type of analysis is a statement of cash flow. This report is used to determine how much money is coming in from operating activities. The numbers for this report are based on expected changes. That way, owners have a clear understanding of where the business is heading.
Finally, you should also run a static budget analysis. This report helps determine operating costs with historical financial data. That way, revenue, and expenses can be clearly outlined. However, this is only really used in small businesses as it requires time and energy to head through each item.
Why Do I Need It?
Ultimately, owners need a budgeted analysis to understand their business. An analysis is an overview of their financial conditions (assets and liabilities) in relation to cash flow. With this information, owners and managers will be able to develop strong financial models. In turn, empowering them to make strategic decisions that have better control over cash flow.
Budgets are also a great way to articulate a business’ vision, strategy, and goals. Without it, a business could lack the discipline and planning it needs to reach it.
How Often?
There is no right answer to how often a business should use an analysis. The standard in the industry for a budgeted profit report is that it be divided into months or quarters for the coming year.
However, a balance sheet and cash flow statement could be done on a monthly or quarterly basis. Even then, if you expect upcoming changes or a major shift in cash flow, it’s important to run these numbers again.
Need Help?
Businesses should not wait too long to look into expenses. Things like accounts receivable and inventory could be causing a huge strain on your bottom line. For this reason, businesses cannot afford to ignore balance sheets until the end of the year.
If you’d be interested in learning more or having us help you with a budget analysis give us a call at 407-328-5001.
