The Source - Budgets Provide Road Map to Profit

You wouldn’t start a highway trip without a good road map, and it’s equally ill-advised to operate your business without a good budget. Like a road map, an effective budget shows the best way to reach your destination based on past experience. But it requires flexibility to adjust to unexpected conditions on the road to profit.

The budgeting process can be divided into the following steps:

Track expenses and revenue. Follow your costs and income in detail over a period of time. Records covering longer periods produce the must useful information, reflecting fluctuations in business cycles. You’ll need at least one year’s data to begin.
Analyze expenses. Separate costs into fixed and variable expenses. Fixed expenses — things like rent, insurance, property taxes — generally stay the same from year to year. Variable expenses — salaries, sales commissions, payroll taxes, and advertising — fluctuate with sales.
Project sales and costs. Using the figures gathered in the first two steps, estimate what you will take in and spend in the budget period. Be conservative in your approach, low-balling income and overstating expenses.
Monitor operations. Keep track of how your income and spending stack up against projections, keeping a broad view of operations. Short-term cost overruns or revenue shortfalls one month may balance out in the next month.
Watch cash flow. Take advantage of any opportunities to build a cushion in your cash flow to compensate for lags in revenue collection. Be ready for everyday delays, like those that come between making a sale and collecting from a customer, and for those that accompany strategic business projects, like the time it takes before an investment in advertising pays off in increased sales.

Budgets are tools for discipline, but they’re also tools for learning and growth. Don’t be afraid to break the budget for a good business reason.

If you get an unexpected chance to acquire a valuable asset or to hire a talented employee, don’t pass it up simply because it isn’t in the budget. And when your estimates for budgeted items turn out to be off, be prepared to examine your budget critically to determine what changes may be appropriate to get costs and revenue back in balance.