Question

put together your list of the top 5 tips for preparing a budget

Answer 1

What is Budget:

A Budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a group of people, a busines, a government, or just about anything else that makes and spends money.

Using a budget is a key component in driving your organization’s financial future, but many businesses wonder: “How do we start?” or “How can we make our current budget better?”

Because a good budget could have a great impact on your overall operations, here are 10 tips to help your business build an effective one.

The Following are the tips for preparing a budget:

Tip 1: Understand What a Budget Really Is

A budget is not meant to manage every penny spent. It is simply a guide to assist you in making better spending decisions, and it can be an eye-opening tool to identify areas for improvement.

When creating a budget, it’s important to maintain the right mindset. If you harbor a negative attitude about budgeting from the outset, the chances of creating a good budget significantly diminish. Instead of seeing it as a hurdle, consider creating a budget a positive move that provides you with a helpful business tool.

Tip 2: Know Your Organization

It is important to understand the risks of your organization and its industry. For example, if you operate in an industry that is significantly seasonal in nature, you will likely need to break down an annual budget into a quarterly, or even monthly, approach.

Before diving into the creation of your budget, you should be aware of pending changes in regulations, such as overtime rules, health care changes and the new tax law. You should also compare your organization to industry standards using your CPA’s tools and resources. Obviously, your organization is not exactly like every other one in your industry, but if you can identify areas where your results vary significantly (and the reasons for those variations), you can make better decisions about spending.

Overall, it’s a good idea to identify the most substantial threats to productivity within your organization and their financial impact.

Tip 3: Build the Right Budgeting Team

“If you build it, it will come together.” Okay, not quite the same line Kevin Costner’s character took to heart in “Field of Dreams,” but it’s very important to build the right team to create your budget. It should not be created by one person. If certain groups of employees are going to be held accountable for the budget, then they should have some influence on its creation.

While we typically restrict budget creation to members of management, maybe it’s time to think outside of the box and involve other individuals who can bring fresh perspectives to the budgeting table. For example, a factory employee may be able to identify when equipment will need to be replaced or overhauled. And who better to predict when potential repairs to delivery vehicles might be necessary than those who drive the delivery vehicles every day?

Tip 4: Be Realistic

A budget isn’t truly effective if it’s designed toward a targeted number. Employees will likely scoff and dismiss unrealistic budgets as unattainable.

Rather, you should develop your budget based on past results and future projections. Analyze financial results from up to five years ago as a starting point. What are some costs that are fixed and inevitable? Those can be entered first. Then you can look at accounts or line items that have fluctuated more drastically over the years. What caused this fluctuation? Were there one-time expenses? Can these fluctuations be controlled? Using past information and adjusting for predicted variances helps provide a more concrete basis for establishing budget numbers.

Tip 5: Be Conservative

As part of your budget, you should factor in some level of the unknown. As I tell our staff during audit training, “You don’t know what you don’t know, but you know that you don’t know something.” In other words, there is always some unexpected element of a project. If we knew all of a project’s anticipated costs and factors, it wouldn’t be a project.

Should you have a line item in your budget for contingencies, or should you round up each individual line item to factor this in? It’s up to you how you factor in unknown elements.

Make sure you consider the need to plan for future years. Economic downturns are inevitable, so in a strong economic year you should not only create a balanced budget but also start building up a cushion for the anticipated rainy days.

Otherthan the above tips, the following are other tips should kept in mind while preparing budget.

Tip 6: Be Flexible

Tip 7: Be Detailed

Tip 8: Be Aware of Financial Relationships

Tip 9: Utilize the Right Tools

Tip 10: Share with other employees in organization