If you can’t pinpoint how your business is managing and spending money how will you do you expect to meet your organizational objectives? The success and longevity of any business hinge on its ability to conduct an in-depth budget analysis.
A budget analysis is exactly what it sounds like. It’s the process of combing through your budget with a fine tooth comb to check where your business’ money is going in order to effectively reorganize its finances to ensure that funding is spent productively.
In this article, we explore some of the techniques you can employ to get a comprehensive budget analysis for your business. Read on.
1. In-Depth Budget Analysis 101: Identify Your Costs
The last thing your business needs is to be caught off guard by unprecedented expenses. If your budget was set for a specific cost, only for a budget variance analysis to later reveal that you had understated the amount, you effectively reduce your profit margin.
This not only moves you further away from your goals but you now have to come up with ways to increase your revenue and profit to offset these expenses. Some of the things you need to consider when costing for expenses include:
- Overstating your costs to give leeway for your business’ expenditure.
- Pay close attention to the amount you set aside for marketing activities. This is usually the easiest to underestimate.
- If your business is at its infancy stages, make sure you factor in the startup costs.
- Variable costs like cost of sales, labor, and commissions need to be included in your budget as well.
- Ensure that you account for fixed costs like rent, utilities, salaries, legal fees among others.
Making sure that you accurately research and identify the operating costs of your business enables you to properly plan how to channel your existing resources. That way you can make informed decisions and steer your company towards growth.
2. Project Cash Flows and Revenues
When preparing a budget analysis, estimating future revenues based on past reports is the lifeline of a successful business. You need to ensure that this is done periodically. Failure to do this on a monthly, quarterly and annual basis may have far-reaching repercussions.
You’re more likely to overestimate your future revenues which would inevitably result in an increase in costs. Here’s how you project your business revenues accurately:
- Use past revenues to come up with a number. This is the forecast revenue that your team knows that they need to work towards.
- Set a realistic budget revenue estimate. If you haven’t established a solid customer base, projecting $1,000,000 for instance, within the first year of your business simply not accurate.
- Use the previous year’s capital budget analysis report, to analyze your previous year’s revenue and cash flows. Use that as the starting point for estimating the current year’s projection.
The takeaway here is that your revenue projection needs to be based on actual data and not on figures you fantasize about. Growth takes time.
3. Determine Your Business’ Gross Profit Margin
Gross Profit Margin refers to the amount of money your business has left over from sales revenue after subtracting the cost of goods you’ve sold. Remember, the cost of goods sold refers to the price of production. That is, what it costs your company to produce the goods and services you’re selling.
You use the Gross Profit Margin to monitor and assess the performance of your business. It provides key insight into the profitability of your company. More often than not, this step of budget analysis is often overlooked which means that business owners have no clue how much they’re spending to run their business.
Money could be getting channeled towards producing commodities that have no bearing on the company’s profits beyond flushing money down the drain. In order to improve your gross profit margins follow this three-step process:
- Itemize all the costs that were associated with the goods you’ve already sold.
- Identify what your overall sales revenue is and deduct from it, the costs associated with production.
- Analyze the individual departments in relation to the entire company
Hiring a CPA to look into this for you, will go a long way into giving you accurate insight into the health of your business. That way you’ll be able to increase your profit margins while reducing your operating costs. There are lots of budget analysis examples available online that you can draw from.
4. Make Adjustments for Unreliable Customers
The reality that every business has to come to terms with is that not all customers will pay them on time. Some of these delays go beyond the agreed upon terms of the invoice.
This has a domino effect on the cash flow of your business since missed payments means that you delay your own payments to your service providers. While building a good rapport with your customers means extending some measure of leniency to them, the problem comes if they make it a habit. This is how you deal with such customers in your budget.
- Set a limit on the number of late payments your business can tolerate. Ideally, this should be no more than three. Keep track of these in your revenue column.
- Factor in bad debt in your budget allocation. You need to identify how much money your business can afford to lose in bad debt in the event your customers evade payment altogether.
Creating business policies that mitigate late payment will go a long way in dealing with errant customers especially those who are clearly taking advantage of your good nature.
For instance, you could impose penalties to encourage them to make timely payments. Don’t be afraid to drop customers who consistently violate your terms of service, even if they’re big spenders. You can measure the overall effect of adopting this new convention via a budget impact analysis.
5. Negotiate for Better Rates with Suppliers
Come up with an arrangement that works for both your business and its suppliers. Sometimes, due to the dynamics of your company’s cash flows, you may not have cash on hand to pay all your suppliers at the same time.
Some of the arrangements you could enter into with them include negotiating for a discount based on the number of goods you procure from them. Alternatively, you could arrange to get the items up-front and pay a little more at a later date for the advancement.
Final Thoughts
A budget is a must-have for every business. But an in-depth budget analysis checks that your company’s budget is not only accurate and complete but, it ensures that you keep track of your spending to meet the organization’s goals.
Does your business need a comprehensive budget analysis? Talk to a tax expert today to get a free consultation. In the meantime, check out the top 5 ways a budget analysis can help your small business.
