5 Things to Consider When Preparing the Annual Budget for Your Company
As a business owner or financial manager, it is imperative to understand how to prepare an annual budget for a company. Small and medium-sized companies often overlook budgeting optimization, but having a comprehensive budget will help you make important business decisions.
If you are considering structuring a budget, there are 5 major questions you should consider to maximize your business ventures. Follow these business budgeting processes to prepare an effective annual budget for your company:
1. Start Budgeting Early
Regardless of the size of your business, you should begin the annual budgeting process three months before your year end to guarantee a detailed estimate by the end of the fiscal year. Annual budgets should be thoroughly monitored and updated throughout the year, so there is no bad time to get started.
2. Involve All Departments
In order to create a comprehensive budget, members of all departments should be consulted on their expectations and requirements for the fiscal period. Each team can bring useful input to the process. The sales team, for example, will assist you with creating realistic revenue assessments. The manufacturing team can provide insight on purchasing costs and technological fees; and the research and development team can bring significant insight into industry projections and expenditures. Considering input from all departments within your company provides you with an arsenal of knowledge so you know which budget items to consider for your upcoming year.
3. Accurately Define Expenses
Sales estimates can have a significant influence on cost projections, but can be complicated to accurately assess. A proper business budgeting process will help you come up with the best revenue estimates.
Evaluating recent monthly growth rates helps you decide if you are maintaining your financial goals. Staying up to date with industry guides and expert advice through publications allows you to focus on financial projections that align you with your competitors.
By keeping open lines of communication with your customers, you can develop a deeper understanding of client expectations and product satisfaction. Discussing revenue goals with your sales team can positively set expectations that promote business growth and effective budget maintenance.
4. Accurately Define Expenses
Once you have defined your revenue figures, you should focus on company expenses. Many companies have expenses that directly relate to revenue such as inventory or employee services. Involve your staff to identify cost-saving strategies that will positively reflect your budget assets and liabilities.
Fixed costs, such as rent, insurance, property leases, and purchase services, should be defined in detail. While these expenses are easy to estimate, standardized policies should be taken into consideration. Comparing rates between insurance companies and distributors can be cost effective in the long run.
Employee compensation should be evaluated according to company growth. When preparing your annual budget, projected growth for the upcoming year should be in line with revenues to establish responsible employee wages.
Estimating the total number of employees is also a critical factor to consider when making a budget. Knowing when you need to hire, what expenses are incurred during the hiring process, and what experience level is required will further optimize your business growth and overall operations.
5. Know Your Cash Flow
A projected income statement is great for overall growth projections. However, it is imperative to calculate the expected cash flow within the business, as cash flow and income statement reports are not necessarily the same. If you pay your creditors faster than your clients pay you, you might need to purchase inventory in advance of sales if your acquisition time is significant.
Implementing a cash flow report along with your income statement using metrics from your balance sheet will optimize your business budgeting process and result in overall capital gain.
Proper Budgeting Fosters Key Business Decisions
Effective and thorough budgeting practices will set your business up for long-term success. Your annual budget should be monitored on an ongoing monthly basis, and you should be conservative with your budgeting.
A flexible budget provides you with some slack for inevitable fluctuating circumstances. Compare your budget with real time results, and you can effectively monitor your expenditures throughout the year and make informed financial decisions.
Get expert advice from NuVest Management Services as you start begin to prepare your company’s annual budget. Contact us today to see how an effective annual budget can affect your business with our consulting services.