Authored by: John Kane, CPA. John is a Junior Manager in the Logan office of Cook Martin Poulson, P.C. John primarily works with tax issues affecting small businesses and individuals. John is a CPA licensed in Utah.
There are a variety of reasons why a business may struggle. When working with a business that is struggling, one consistent theme we see in the business is they don’t have a functional budget in place. Whether you’re struggling to keep the doors open or are trying to keep up with rapid growth, effective budgeting is a valuable, often overlooked tool.
Take Time to set the Initial Budget
Frequently when businesses go through a budgeting exercise, they will use last year’s numbers as their budget, walk away and wonder why they ended up spending more than they had hoped to spend. Taking time to set a meaningful budget will give you ownership in the finished product and increase the chances of you achieving your end target. Using last year’s numbers as a guide is ok, but don’t let past performance dictate your future success.
Review & Be Diligent
Budgeting isn’t a once-a-year activity. Though the annual budget is the most time consuming part of the process, investing time into the initial budget will prove ineffective without appropriate follow-up. Review the budget as part of your weekly management meetings. Discuss what has happened and what is coming up that will affect the budget. Make plans to address any deviations from your budget. You may not see immediate results, but diligence will pay huge dividends in the long run.
Look back in your business at one year ago. Are you where you thought you’d be? Most would answer ‘no’. Something will inevitably come up and you’ll spend more in an area. This is where flexibility becomes important. Perhaps a piece of equipment needed an unexpected major repair, or the market has driven up the price of raw goods you purchase. When one area is over budget, another area must be under budget in order to achieve your target at the end of the year.
Have a Target
Having a target and reason behind that target will give meaning to your budget. This answers the ‘why’ in the exercise. Are you trying to fund growth, make more money, or spend in line with industry standards? Asking these questions and others can drive your line item numbers and give your budget the meaning it needs.
While budgeting won’t guarantee success, it will help avoid failure. Taking time, reviewing, being flexible, and having a target will ensure your budget will provide you with the useful information you need. Feel free to contact one of the professionals at Cook Martin & Poulson, PC for more information and budgeting tips.