How to do business budget planning for new fiscal year?
Business budget planning is one of the most strategic decisions for a business. Many companies consider budgeting as a back-office function, a result of which is witnessed as unplanned cash flow and disproportionate allocation of financial resources.
While many companies continue to run on a hamster wheel while neglecting budgeting plans, some have mastered their financial planning and working capital requirements. With the new accounting year around the corner, companies have begun guarding themselves with the fiscal year budget.
However, with every passing year, the budgeting techniques change. Therefore, it's imperative for companies to know the upside of reworked budgeting methods and their easy implementation.
Before the start of every year, it's necessary that companies plan and predict their future income and expenses. Though it can get messy while predicting your income and gains, companies can always be ready with their expenses and losses.
Creating a business budget can help the management decide their cash utilization - how the money will be spent, which department needs what amount, the amount set aside as an emergency fund, the amount to be kept in general reserve, and more.
Moreover, companies drive important business decisions and activities through a budgeting plan. They focus on cost-cutting, optimizing the financial resources, and work on optimizing the spending culture of a company.
Companies that regularly make a business budget have a pretty good idea of how the whole process works. But, companies budgeting for the first time might need guidance beginning from the fundamentals.
Creating an effective budget and capturing every cost, including off-guard costs, go hand in hand. If companies cannot locate every penny walking out of business, no near-perfect budget will work to its best capability. Costs discovered in the later stages lead to budgets going off-track, thereby disturbing the equilibrium between departments.
Therefore, before creating an annual budget, keep all your past expenses and costs into consideration and the likelihood of new emerging costs. For better capturing of costs, divide the expenses into different categories. Ideally, separating the fixed and variable costs while breaking them down further will clarify the expense categories better.
Through proper research and understanding of the business operations, the financial managers can create an overall budget that can act as a definitive guide for cost accounting.
Estimating your future revenue can help businesses in undertaking informed decisions. Based on the revenue generated, companies can plan for growth and expansion activities, consider launching new product lines and get insights into the company's goodwill.
Follow the steps below to know your revenue projection:-
Forecasting: Forecasting revenue considers the sales of the previous quarter/year, number of units sold, highest revenue-generating category, average selling cost, supply chain costs, and more. Companies can derive a good picture of the sales forecast based on these categories.
Factor in the sales department: To devise an accurate revenue budget, the financial managers need to keep pace with the sales department, understand their sales projection, how easily they can convert potential customers, do they have enough resources for the same, and many more factors.
Past performance: Based on the revenue generated for the past year, companies can predict the sales forecast for the upcoming quarter or year.
It's also important to note that the sales forecast is not 100% accurate. Businesses operate in a dynamic environment that continually shifts based on economic, political, social, legal, and technological aspects.
Businesses might encounter a lawsuit filed by the buyer or supplier. The legal fees and expenses are enough to burn the pockets as legal matters do not settle early. Though the chances of a situation like this are low, large corporations face such circumstances for defamation by their competitors.
Hence, having a contingency budget in place might help you during these times, as withdrawing funds from other budgets will upset their planned functions.
Follow the steps to develop your contingency budget:
1. Practice risk analysis from time to time.
2. Devise a plan for financial underperformance or situations of cash crunch.
3. Mitigate losses by addressing customer grievances.
4. Try to settle the matter outside of the court.
Budgeting for business is incomplete without assessing your capital expenditures. Capital expenditures are cost-heavy expenses for a company capable of draining down its financial resources in no time.
Though capital expenditures are not expenses for a company, they are an investment that helps generate revenue. Through budgeting, companies estimate the requirement of plants, machinery, building, equipment, and more. Additionally, the accounts team needs to provide yearly depreciation for these assets.
After completing the expenses and revenues, you reasonably estimate the projected cash flow. Based on the predicted data, you plan your monthly payments, sales expectations, accrued income, and more. Additionally, you can optimize your cash conversion cycle by remodeling your payment agreements with buyers.
For better cash flow budgeting, finance managers can study previous cash flow patterns, make assumptions based on the sales, and allocate funds accordingly. Companies can incentivize their buyers with early-payment discounts to maintain a healthy cash flow.
The budget is not only for the management but for the entire organization. Hence, it's pretty compulsory for the CFO and financial managers to discuss the budget with departmental heads. This ensures taking consideration of every department's financial requirement, budgetary problems, implementation hurdles, and more.
Establishing direct communication with the departmental heads can help understand their and employees' expectations. Additionally, it's always advisable to keep the budget flexible. So when an unforeseen situation arises, the manager can mold the budget according to it.
The cost of operations rises as your business grows. A majority of the company's revenue walks out in the way of vendor payments. Due to the fluctuating prices of raw materials, the final price of goods also tends to change.
If the company is unable to make vendor payments on time, the entire production line is halted. To prevent such a situation, the company can negotiate the prices of the supplies and ask for early-payment discounts. This reaps dual benefits to the company - first, the resources are available before significant damage. Secondly, the company saves a good portion of cash which compounded annually sums up to a vast amount.
The effectiveness of your fiscal year budget will be reflected in your profit and loss account and cash flow statement. Creating an immaculate budget is not an overnight task. Companies must put upfront efforts and develop a collective force to achieve their organizational goals.
Through the help of budgeting, companies can witness healthy operating cash flow, better resource allocation, identify mundane areas of the company, do cost-trimming in required areas, and maintain an adequate cash balance.
No business can protect itself from the effects of the business environment, whether positive or negative. Businesses that adapt to these changes in time are the ones that survive. Preparing your company for unexpected changes might be challenging, but with proper guidance, the management can succeed.
Therefore, while drafting the budgeting plan, it's essential to consider the business's external factors. Companies can deal with internal factors like customers and suppliers. However, predicting the impact of the external factor on business operations is quite tricky.
Business budget planning is a never-ending process. It does not end with drafting a formal annual budget, nor does it end with implementation.
After creating a business budget, the CFO and departmental heads are responsible for monitoring the effectiveness of a budget. They need to look after their employees, help them quickly implement, and address any hurdles. If the manager feels the department is working under-budget, they can inform the CFO of the same and take corrective actions.
Mentioned below are a few ways how the companies can conduct budget reviews:
1. Alter the budget figures if necessary.
2. Conduct quarterly reviews and take into consideration the industry changes and trends.
3. Analyze if the budgetary goals are achievable or not.
4. Consider speaking to your financial advisor before making paramount decisions.
To streamline your business expenses and prevent unnecessary spending, Volopay brings you automated budgeting software. Volopay is your one-stop solution to manage multiple departmental budgets from a single window without complications.
For every department , there are two approval policies governing the payments. Users can select common or different approval policies for payments made through Bill Pay and cards.
In Volopay, the person who creates the department becomes its owner. The department owner has the authority to edit the funding, change the budget limit, add or remove an employee, and alter the settings.
Each departmental budget displays the gross spending made through it. Users can view the monthly spend snapshots, and associated cards and bill payments. The expenses tab shows the expenses created from the budget and corresponding details.
The department limit is divided into three types. First is spent, the amount of the budget that has been exhausted. Second is assigned, the amount allocated to the employee for making payments. And third is unassigned, the amount not yet used nor given to be used.
Users can easily create new budget in Volopay. Volopay offers two kinds of budgets. First is recurring budget, which is the budget will automatically reset itself on the first of every month. The amount of reset will be the budget limit as set by you. Second is one-time budget, which is the budget amount will not get reset anytime unless you do it manually.