Improve Your Business by Strengthening Your Budgeting Skill

Having a smart budgeting skill is a powerful tool. Budgeting's main purpose is to organize your finances around achieving an end goal, such as your 5-year plan. You wouldn't travel to Paris without knowing the resources to get there (e.g. equipment and transportation needed). Your 5-year plan shouldn't be any different. Developing a good budgeting skill will help you plan for the future activity, increase company profits and performance, make important financial decisions, defend against unforeseen problems, and most importantly, budget toward your goal. It gives you a clear standard to achieve. Most entrepreneurs just try to make next month's payroll. Smart entrepreneurs on the other hand think both short-term and long-term when budgeting. How to Budget Our most important budgeting tip starts with writing down your goal. Now staple this sheet to where you'll always see it. This keeps you focused on buying things that will only help you achieve this goal. Importantly, it rids you of buying unneeded items, and keeps your cash flow efficient. Once you have your goal handy, you'll have an easier time planning your short-term monthly finances, as well as your longer-term plans: quarter-to-quarter, and year-to-year. Set realistic goals for monthly, quarterly, and yearly timeframes. What do you expect to make? How will your profitability ratio improve? When will you know you've met the goals? Review your budgets regularly. This will help you change what's needed. Budgeting Gives You Goals Smart businesses use budgeting to set standards they want to achieve. They can then measure periodically their actual performance against predictions to see how they're doing. For example, let's say Marie's Home Furnishing sets goals to increase quarterly profits by 5% and yearly goals by 20%. When the quarter comes, Marie sees her company surpasses her quarterly goal by achieving a 7% increase. After a year though, she doesn't meet her expectations when her company only improves 15% in profits. The yearly setback lets Marie study how she could've improved her financials. Maybe she could've cut back on inventory, or increase employee productivity, or improve customer service. Developing a budgeting skill is a great tool to measure your performance. Sensitivity Analysis Another great tool of budgeting is that it lets you do a sensitivity analysis. It's a great way to plan for your business. When you have all of your variables down, you can adjust one variable to figure out how that affects the other variables. For example, if you reduce your operating expenses, you can see how it affects the amount of sales you'll need. Common variables in the sensitivity analysis include sales, cost of goods sold, operating expenses, interest rates, accounts receivables days, accounts payables days, inventory days, fixed asset purchases, and acquisitions. If done right, having a business budgeting skill is a great tool to monitor and improve your company's performance.

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Posted on February 18

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