Business Tip - Budgeting Basics
The process and mechanics of budgeting vary by organization.
Generally, budgeting consists of the following three phases:
Evaluate your revenue position.
Ask yourself a few simple questions. Who are your customers?
Who is your competition? What economic or technological changes
are occurring that may affect your revenue? After careful consideration
of these facts, you can establish your revenue goals.
Understand your business' cost structure.
You must recognize what costs are incurred in a year and separate
them into variable and fixed costs. Then ask yourself, are there
unusual, nonrecurring costs which should be anticipated? From
this point on all costs should be estimated based on the volume
of business activity planned.
Research your competitors' business.
What markets are your competitors focusing on? How well do you
compete within your industry? Are your competitors cost structures
different from yours? Understanding the revenue and costs of
other in your market can help provide guidelines for evaluating
the reasonableness on your own cost structure.
With the information gathered from your research phase, you can
now analyze possible revenue and expenses for the next year.
After analyzing your future revenues and expenses, you need to
decide on one set of revenue and expenses to represent your expectations.
- Document and communicate the budget.
To ensure that your budget is an effective management tool, you
must be able to compare budget and actual results. For example,
a budget which measures sales by type must have a reporting system
which provides this financial information. Therefore, documenting
and communicating the final budget can lead to many more benefits.
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