Last Updated on December 14, 2021
Like it or not, budgeting is one of the most crucial aspects of running a successful business of any size.
Your monthly budget—and the in-depth analysis it entails—gives you all the information you need about the money your business brings in and where it’s going. Tracking your cash flow is especially important if you have outside investors eager to reap the fruits of their contributions, as they’ll want to know what the funds they put up are being used for and how they’re likely to impact operations down the line.
Making an effort to understand better the finer points of your business’ budget may not be fun or exciting, but it should be among your top priorities if you want to watch your profit stream grow from a trickle to a surge.
Why a Regular Budget Analysis Is Important
A budget analysis is like a report card for your business’s finances. It tells you how your company is doing across many different categories regarding earning and spending and where it has room to improve.
More notably, however, it can tell you how to improve.
The figures, indications, and projections you get from one period’s budget serve as the basis of the next period’s budget. Over time, if you’re paying close enough attention, you’ll begin to zero in on areas where you may be able to lower expenses, as well as generate ideas for how to ride the wave of monetary momentum created by popular products and services.
Tips for Getting the Most out of Your Budget Analysis
Performing a budget analysis isn’t like drawing up a budget.
There are no easy formulas to apply, no trendy systems, or one-size-fits-all procedures to put in place. Assessing the real-world outcomes of an expenditure plan is a sensitive task that demands an intimate knowledge of how your business operates and a knack for reading evolving market conditions.
That said, there are things you can do to make the potential ramifications of a budget less opaque and limit the number of variables you’re forced to contend with each month.
Be Clear About Your Goals
The whole point of performing a budget analysis is to help your company meet its goals. If you’ve failed to determine exactly what those goals are, or you’re just going through the motions aimlessly, you’re only wasting your time arriving at takeaways that are of no use to anyone.
That’s why you should always have a clear idea of where you want to go before you begin taking steps to get there. Otherwise, there’s a high probability that you’re just throwing away money on frivolous transactions that lack intention and foresight.
Needless to say, that kind of negligence is the very definition of money mismanagement.
Establish growth targets that are practical yet optimistic and use those targets to shape your sales and spending projections. That way, you’ll have something concrete to aim at going forward.
Use an Accounting Software You Can Depend On
Your accounting software can’t do the tricky work of forecasting for you. Still, it can free you up to do it yourself and do it more effectively by presenting key figures in an organized, intuitive manner and offering prescriptive solutions.
As such, a solid standalone accounting framework is your best friend and most useful resource when it comes to collating the data you need to make informed budgeting decisions.
Excel and similar plug-and-play spreadsheet platforms just aren’t nuanced enough to make reliable forecasting aids. Ditch them and choose a software that provides detailed reports you can use as a jump-off point for future allocations of funds. Planning your next budget cycle will feel like calculating a precision landing rather than a leap of faith.
Switch to a Rolling Budget Scheme
Time and energy permitting, you may want to consider hopping on the rolling budget bandwagon.
Traditionally, formulating a budget requires you to set goals and estimate expenditures for a specific period, typically one business year. However, with a rolling budget, you continually update your budget over shorter intervals (i.e., quarterly or even monthly). Doing so more accurately reflects the conditions you’re operating under, sharpening your predictive abilities and minimizing the kind of waste that long-term budgets often invite.
There’s a reason so many companies have begun adopting rolling budgets—they’re precise, flexible, and come with built-in safeguards against unnecessary expenses.
Acting on a Budget Analysis
You’ve reviewed the numbers and profits and losses. Now, what do you do with that information?
Step one is to share it with all your need-to-know stakeholders, including investors, executives, management, and the government. Step two is to use it to build a stronger budget that promises greater returns on your company’s day-to-day operations.
Putting Together a Budget Analysis Report
It’s one thing to comprehend the contours of your budget more clearly, but it’s another thing to break it down in a way that will satisfy exacting financial officers or a board of antsy investors.
Budget analysis reports are designed to facilitate this task.
When you prepare a budget analysis report, what you’re essentially doing is comparing how well your outcomes lined up with your initial projections. There’s much to learn from the discrepancies between the two sets of data, even if your company ended up performing on-target or better than expected. Your analysis and subsequent report will therefore contain valuable insights on what factors are driving growth and where you might be able to trim the fat.
If you’ve got investors to appease but don’t have the luxury of keeping a dedicated financial professional on the payroll, you’ll be pleased to know that most upper-tier budgeting software comes with advanced reporting features that will handle most of the heavy lifting for you.
Optimizing Your Budget
Once you’ve passed on the findings of your report to your shareholders and registered their input, the preceding period’s budget will become a template for drafting the next period’s.
This usually involves coming up with cost-cutting measures and finding ways of putting profits to good use, such as launching new products or reinvesting in equipment, advertising, or labor.
Whatever tweaks you make should keep your main objective in sight: to reduce the amount of cash going out by developing increasingly shrewd spending habits and thereby compound the amount of money coming in.
If you’re beholden to a board of directors, budget restructuring will be a group effort characterized by much discussion, deliberation, and compromise. If you own your own business, the choice of how to utilize your money falls entirely on you—but so do the consequences of using it unwisely.
If you’re like many business owners, balancing a budget may seem like a necessary evil; a tedious, time-consuming process that accomplishes little more than confirming what you already know, which is whether your net worth is trending up or down.
But in reality, budgets are powerful predictive tools that can help you enhance your overall worth, provided you know how to use them correctly. The key is to learn to see them for what they truly are—money-management maps that can lead you to the riches of your true earning potential and point out the many pitfalls along the path.
More Accounting Resources
- Cash Conversion Cycle Calculation
- How to Do a Break-Even Analysis
- Creating a Business Cash Flow Statement
- Accounts Receivable Aging Schedules
- Cash Budget vs Statement of Cash Flows
- How To Do Cash Flow Modeling
- Debt-To-Equity Ratio Measurement
- Cash Flow Margin Calculation
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.