February 24, 2021
Many see budgets as a challenging process. However, budgets are a key part of an entrepreneur/manager’s tool kit for communication, motivation and control. Budgets are a great way to look into the future and consider where you would like to be in 12 months-time and are a perfect way to monitor your progress as you move from today into the future.
In any organisation, budgets serve many purposes such as:
‣ Communicating high-level business plans, objectives and goals into a road map
‣ Assisting with management control by monitoring performance (comparing actual and budgeted performance) and investigating unexpected variances
‣ Motivating and encouraging management and employees to achieve expected financial goals and rewarding them with financial incentives
A good budget considers not only income and expenses, but also capital, tax and financing arrangements. After completing your budget, consider the following:
‣ Have you included all of your income? It is important to include not only goods sold for cash but also interest income and sales of any capital items.
‣ Have you recorded all anticipated capital expenditure such as of property, plant and equipment (PPE)?
‣ Have you included all your expenses as they are anticipated to be incurred?
‣ Do you have any tax or GST payments that need to be included during the year?
‣ Do you have sufficient cash to fund the equipment purchases later in the year? If not, how will you finance them and can you extend limits on existing facilities?
‣ Have you included all of your anticipated loan repayments and made consideration for any additional finance facilities you are anticipating utilising?
Budgets don’t need to be complicated, the simpler the better.
Don’t prepare a budget and then forget about it. At the end of the day a budget is a plan and plans always change. 12 months is a long time – just think about what happened in the last 12 months! To get the most from your budget, make sure you regularly review, update and modify your budget to reflect the current situation.
At Knight Public Accountants, we can discuss with you best practices, methodologies and implementation of budgets. Contact us today!
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