Thursday, February 24, 2011

Small Biz Thursday - Developing a Business Budget

After over a decade, I made the decision to complete my Bachelor's Degree in Biz Mgmnt.  I just completed my first class, so I feel like it's "official" that I am a college student again.  I am actually enjoying it! 

My goal is to incorporate any research papers, essays, etc. around small business ownership and share it with others....hopefully, someone can benefit from my research!  Sooo, here goes.......I edited some of the content because I didn't want it to be too long.  I also added a few links to help credit the sources of my research (APA format has become my new BFF...UGH)....

Developing a Business Budget

The decision to leave the corporate world and become an entrepreneur can be exhilarating. As an entrepreneur, there are several factors to consider before the dream becomes a reality. One of the key factors to consider is a business plan. A business plan is similar to a road map because it shows where the business is going and how it will get there. However, the plan itself is not sufficient. In order for a business plan to be concrete, it must include a budget and a financial forecast. The budget will identify goals and objectives throughout the plan. There are a few basic guidelines for the business owner to follow throughout the development process of the business budget.

Budgeting basics

Knowledge is power. Therefore, it is important to learn the key concepts of budget forecasting by reading business books.  The website article, Guide to Budgeting and Forecasting Basics, recommends avoiding academic textbooks because they tend to focus more on the theory than practical applications. For better results, the author suggests books and articles targeted to the business owner's perspective. For example, a business owner of handmade items may want to study articles and books that are written for handmade business owners. The budgeting ideas for a small handmade business would not likely coincide with a large corporation.

Sometimes the simplistic act of writing down the budget for a month, quarter and year is sufficient for planning. The details can be reviewed with an accountant or staff members to validate accuracy and discuss the logic behind the plan. One advantage of today’s business world is the availability of budgeting software. Business budgeting software can enhance the quality and accuracy of the forecasting budget. Part of a new owner’s learning process may include researching a software supplier. As the business progresses, there are valuable reports that can be generated from the accounting software. These reports will help determine if the business is meeting the objectives set within the initial plan.

Creating objectives

What are the objectives of a budget? The obvious answer is to forecast the results of the upcoming year. However, the budget is not limited to this objective. There are a number of legitimate objectives within the budgeting process. The objectives vary depending on the organization level. The business owner needs a budget that

• is realistic, accurate and internally consistent;

• predicts the best results achievable with acceptable risk;

• contains the information most useful for management;

• is consistent with strategy;

• facilitates goals setting and measurement;

• communicates strategy and plans to the organization;

• communicates operating plans across functions.

Since the objectives must be responsive to the needs of all participants, the budgeting process can easily generate conflict within the organization. Therefore, it must be designed to meet the objectives while minimizing the adverse effects of the inherent problems, yielding the best possible planning document. Conflict is only one of the inherent problems outlined by Robert Finney in his book, Powerful budgeting for better planning and management. Because a budget deals with the future, there is always the underlying problem of uncertainty. These problems must be overcome for the budget to be a useful planning document.

Overcoming obstacles

It is imperative to consider the problems within the budget process because they will not go away. In order to overcome these problems, the business owner should focus on what the company wants to do, on its real problems and opportunities, and continue striving for improvement and excellence.
The requirements are to

• ensure that everything in the budgeting process promotes objectivity and concentration on the real strategy, opportunities, and problems of the company;

• deal realistically with uncertainty and uncontrollability;

• focus the organization’s attention on the parameters most important to the company performance and strategy and demand the best possible predictions for all parameters;

• promote improvement and encourage excellence throughout the company.

At times, the budget must be adjusted to meet the demands of the environment. Every organization will be impacted by unpredictable outside events. It is during times of chaos that good budgeting can help contribute to better business results. Even a negative situation can produce positive results because the owner and staff may be forced to identify solutions to serious problems.

A budget is much more than numerical calculations and a good software program. This activity is essential in setting priorities and achieving business objectives. However, budgeting does not have to be a dreaded, daunting task for the business owner. With knowledge, the business owner can overcome obstacles as they arise. In turn, developing a business budget can be a challenging and exciting opportunity to produce positive results for the organization.

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