Client
LoginCreate a simple but
effective budget for your business
An
accurate,
useful budget
can be a valuable decision-making tool to analyze potential business
threats and opportunities and help entrepreneur make sound strategic
and disciplined choices. This article introduces a simple approach to
creating an effective budget for small and medium size businesses.A budget is a financial plan that incorporates a business’s overall strategic goals and objectives. It should be used as a management tool to establish clear financial expectations that allow the practice to compare actual performance to budget. Creation of a working budget requires buy-in and accountability from business owners, management team, employees other key stakeholders.
The budget process can be broken down into four main areas:
- Review of historical financial statements and productivity reports.
- Assessment of changes likely to impact your business in the future. This includes changes in market, competitions, anticipated capital purchases, new business lines, etc;
- Forecast of future productivity / trade / service levels and operating expenses;
- Incorporation of the budget with monthly practice management reports.
Getting Started
The formal budgeting process should start two to three
months before the beginning of the next financial year. This allows a
time to assess at least nine months of productivity and financial
reports to plan and forecast results for the upcoming financial year.Involve key stakeholders
Creating a meaningful budget requires
buy-in
during all stages of the process from team members of your business at
ll level, including business owners, management, employees and other
key stakeholders. Obtaining high-level involvement helps in the
alignment of goals and in keeping all members of the team accountable
for the financial success of the organization.Assess historical data
A critical early step in the budgeting process
is gathering and reviewing specific historical data to establish
baselines to predict future performance. This review should include
scrutiny of financial statements, physician productivity reports,
employee payroll reports, building lease agreements, marketing plan etc.Forecast revenue
Forecasting revenue form each segment of your
business is crucial aspect of developing a comprehensive budget. The
target level of trading / production / service activities are
calculated using prior year activity reports and prevailing market
demand. Once the data is gathered, the first step is to calculate the
revenue on the basis of expected market price for offered products /
services.Review staffing levels
Accurately forecasting all staff-related costs
is necessary because employee wages and benefits are normally the
considerable portion of business running costs. It is recommended the
business scrutinize each employee individually and anticipate any
changes in salary or benefits. This is also an appropriate time to
anticipate potential new hires during the next year and include in the
budget all related salary, payroll taxes, and benefits.Review occupancy costs
After payroll, occupancy-related expenses
(i.e., rent, building repairs and maintenance, utilities) are typically
the next largest expense for a business. It is necessary to review
building lease agreements to forecast any changes for the coming year,
since most leases now include automatic rent escalator clauses.Forecast variable expenses
Variable costs are unique because they
increase or decrease in direct relation to volume or level of business
activity. Examples include raw materials or power consumption for
production or assembling business. In most cases, estimating these
expenses can be done on a cost-per-unit basis if tracked to the
specific product or procedure. Prepare for capital purchases
When preparing a budget, it is important
to include anticipated capital purchases such as new vehicle, equipment
or facility improvements. To create a capital budget, identify the
anticipated purchases, estimated costs, and timing of the acquisitions.
Depending on the purchase method, the business will likely incur
interest and depreciation expenses, both of which should be included in
the budget.Identify other expenses
Estimating other expenses involves a thorough
review of each category to identify potential changes from historical
levels. Pay special attention to major categories not mentioned above
such as marketing and insurance. A simple method for forecasting other
expenses is to determine the monthly average from the prior year and
multiply by 12 months. Applying a percentage cost increase (such as 3%)
to factor in for price increases is recommended.Incorporate other profit centers
Business can budget ancillary activities such as income from franchises
or subleasing business
premises. Predicting revenue can be tied to historical performance as
well as to any anticipated changes such as a new provider or location.Be conservative (but accurate)
As a general rule of thumb, it is best
to be conservative when forecasting revenue and expenses. It is almost
always best to aim low on revenue and high on expenses to create wiggle
room. On the other hand, it is important to remember that a budget is
an important planning tool and cannot be used for that purpose if it
does not accurately reflect the current performance and future
expectations of the practice.Integrate the budget
Once the revenue and expense projections are
complete, the budget should be compiled similar to a profit and loss
statement. It should be integrated into monthly reports that compare
actual results to the prior year and budget. These reports will help
monitor results and identify variances that management can use to
create corrective action plans if necessary. It is important to review
and track all results and reports regularly.A Sense of Control
When properly executed, budgeting exercise will
quickly become one of the most valuable resources in a business’s
decision-making toolbox. A proactive, comprehensive budget gives a
practice the ability to properly track results, identify areas of
concern, and quickly intervene when issues arise. As mentioned
throughout this article, it is essential that key stakeholders are
involved throughout the process and are held accountable for meeting
(and beating) the organizational goals established from the budget. The
tips presented in this guide are designed to give physician owners and
administrators an increased sense of control over the long-term
financial success of the practice.Too much to digest? Let our experts
work on implementing budget for you. Enquire now..
