A Tool for Business Success
BUSINESS ADVICE FROM CPAS
Your business opportunities improve with the use of a budget-a powerful tool which assists you in achieving your financial goals. A well-designed budget helps you:
- PREDICT INCOME AND EXPENSES.
- CONTROL CASH FLOW.
- COMMUNICATE FINANCIAL GOALS.
As a small business owner, you may not have the time or financial expertise to establish guidelines for predicting income and expenses. Certified public accountants (CPAs) have the knowledge in financial and business matters to assist you in developing an effective budget.
THE BENEFITS OF BUDGETING
Developing a budget for your business on an annual basis allows you to review the business’ overall operations. Budgeting also permits you to identify those factors that are key to the success of the organization. These factors can be closely monitored throughout the year and adjustments can be made for critical elements.
A budget documents your goals and expectations for a given time frame. You may want to share your budget information with people inside your organization and with significant third parties, such as bankers.
Anticipate future cash needs.
Cash flow is the life-blood of any business. Budgeting allows you to look at anticipated sources and uses of cash to determine cash needs for the year. These estimates can be helpful in determining if there will be sufficient cash flow for the year’s operations or if additional sources of cash will be needed to attain financial goals.
Monitor your business’ actual performance.
Most likely, actual business results will differ from your plan. By comparing actual performance to anticipated performance, you will be able to examine the variances and determine the business factors which caused these differences.
The information derived from comparing your budget to actual results will enable you to modify some of the operating elements of your business. In this way, a budget may lead to more practical decision-making.
The process and mechanics of budgeting vary by organization. Generally, budgeting consists of the following three phases. Each stage can provide valuable insights into your business.
Evaluate your revenue position.
Who are your customers? Who is your competition? What economic or technological changes are occurring that may affect your revenue? These and many other questions about your market and your position in that market must be addressed. After carefully evaluating these factors, you can establish realistic revenue goals.
Understand your business’ cost structure.
To generate the desired sales volume, you should recognize the costs involved. What costs are incurred in a year? Which costs are variable and which are fixed regardless of the volume of business activity? Are there unusual, nonrecurring costs which should be anticipated? All costs should be estimated based on the volume of business activity planned.
Research your competitors’ businesses.
What markets are your competitors focusing on? How well do you compete with others in your market? What are your competitors’ revenue and costs? How are their cost structures different from yours? Understanding the revenue and costs of other competitors in your market can help provide guidelines for evaluating the reasonableness of your own cost structure.
With the information derived from the research phase and an understanding of your own goals, you can analyze possible revenue and expenses for the next year. After analyzing these alternatives and evaluating the impact of each on the future of your business, you need to decide on one set of revenue and expenses to represent your expectations.
3. Document and communicate the budget.
By itself, the budgeting process is helpful, but many more benefits can be gained by documenting and communicating the final budget. To ensure that your budget is an effective management tool, you must be able to compare budgeted and actual results. For example, a budget which measures sales by type must have a reporting system which provides this financial information.
DEVELOPING THE BUDGET
Creating a useful budget takes time. CPAs can help you make the most of your time by guiding you through the budget process and offering you sound advice in setting realistic objectives. Because of their inroad backgrounds and expertise in business matters, they are qualified to conduct a thorough financial examination of your business. They can then work with you to develop a formal budget which meets your financial goals.
A CPA CAN HELP YOU
Evaluate your marketplace.
Evaluate your company’s cost structure.
Examine the interrelationships of revenue and costs for your type of business.
Compare your company to industry standards.
Focus on the factors which have the most impact on your business’ success.
Prepare and document your budget so it will be a useful management tool.
Develop processes to compare your business’ actual performance and planned performance.
Identify the types of new management information which may help you make more informed decisions.
Budgeting enables you to visualize the future of your business. Using a budget as a benchmark, you can more readily identify where actual performance differs from planned performance. This insight will lead you to adjust the actions of the organization accordingly. A CPA can help make your budget an invaluable vehicle to put you and your business on the road to success.
American Institute of Certified Public Accountants
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New York, NY 10036-8775
Copyright 1991, revised 1995