In this first in a series of three articles, we share information for small business owners about budgeting and how the right platform can help.
R&A CPAs recommends QuickBooks Online to most clients, though we also work with QuickBooks’s desktop version. In this series of three articles, we focus on QuickBooks Online. We hope you find the information useful in selecting accounting software for your business along with insights into how the right platform can help you run your business most effectively.
Budgeting is the process of preparing and overseeing a financial document that estimates income and expenses for a period. Budgeting in a business has benefits that go beyond the financial dimension and have more to do with business management in general. Creating a budget requires number-crunching, attention to detail, and making informed decisions about fund allocation-but it is well worth the effort. For business owners, executives, and managers, budgeting is a key skill for ensuring organizations and teams have the resources to execute initiatives and reach goals.
The Benefits of Budgeting:
Budgeting forces managers to do better forecasting. Managers should be constantly scanning the business environment to spot changes that will impact the business.
- Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance. The budgeting process can have a motivational impact by involving managers in the budgeting process and by providing incentives to managers to strive for and achieve the business’s goals and objectives.
- Budgeting can assist in communication between different levels of management. Putting plans and expectations in black and white in budgeted financial statements, including definite numbers for forecasts and goals, minimizes confusion and creates common language.
- Budgeting is essential in writing a business plan. New and emerging businesses need to present a convincing business plan when raising capital. These businesses may have little or no history, so the managers and owners must demonstrate convincingly that the company has a clear strategy and a realistic plan to make a profit.
Types of Budgeting:
There are several budgeting types that each prioritize different factors when approaching a financial plan These include:
- Zero-based budgeting, which sets each item at zero dollars at the start of the periods before reallocating.
- Static budgeting or incremental-based budgeting, which uses historical data to add or subtract a percentage from the previous period to create the upcoming period’s budget.
- Performance-based Budgeting, which emphasizes the cash flow per unit of product or service.
- Activity-based budgeting, which starts with the company’s goals and works backward to determine the cost of attaining them.
- Value Proposition budgeting, which assumes no line item should be included in the budget unless it directly provides value to the organization.
The Budgeting Process:
A basic budget consists of projected income and expenses for a given period. After expenses are subtracted from projected income the leftover money can be allocated to projects and initiatives, ensuring you are not planning on overspending. The longer you have been in business, there is more data to look back on to help create a budget. New businesses might have to do more extensive research to gather realistic estimates and forecast finances.
The following steps will help you create a successful budget:
- Keep personal and business accounts separate – Don’t use your personal account to pay business expenses, and don’t use your business account to pay for personal expenses.
- Choose your budgeting tool – Whether it is an app, an Excel file, or accounting software you will need a system to create and keep track of the budget.
- Examine your revenue – Identify all sources of revenue and calculate monthly income. Typically, a budget is for 12 months or more, so account for any revenue fluctuations anticipated during the year.
- Subtract fixed costs – Any cost that is necessary on a recurring basis for the operation of business, such as rent, supplies, payroll, debt repayment, depreciation of assets, taxes, and insurance.
- Determine variable expenses – Expenses that can fluctuate, are not necessary, but can increase profitability, such as utilities, owner’s salary, replacing equipment, office supplies, professional development/education, and marketing costs.
- Set aside a contingency fund for unexpected costs – One-time costs never come when it is convenient. Prevent fear of unexpected costs by implementing an emergency fund.
- Create a profit and loss statement – Add up all your income for the month and then subtract all your expenses for the month.
- Outline your forward-looking business budget – Projecting what will happen to your business in the future is educated guesswork. Reference the profit and loss statement to better understand the seasonal ups and downs, Investments worth repeating, and expenses to avoid in the future.
Clients that are QuickBooks Online Plus and Advanced users already have access to create budgets and track business profitability. Budgets can be tracked with specific reports that show either an overview of the budget or a budget vs. actuals summary to monitor variances. This can be very beneficial in tracking budgets for specific jobs or locations. QBO Plus and Advanced also offers a Cash Flow Center that helps support budgeting and forecasting with connected data and transactions for a real time complete picture of cash flow. Clients can view prior and projected cash flow for 90 days with and without any adjustments to explore different scenarios that may affect the budget.
Review your budget daily or weekly to make sure you are following it. At the end of the month, go back and see how well the budget was followed and find what numbers need to be adjusted for the next month. Budgeting requires constant monitoring of expenses and income. Our experts at R&A CPAs are happy to help you find the right kind of budgeting that would work best in helping your business be a success!
About this Author
Suzan has 20 years of bookkeeping experience, focused on accounts payable and payroll. She is certified in QuickBooks Online Advanced, QuickBooks Online Payroll, and Bill.com and is proficient in several third party applications including ADP and Paychex.