Financial controls in your business are the foundational blocks you need to inform you of input resources and output returns. In a nutshell, budgeting helps you to create the financial controls foundation. Here’s how…
If you’re not already budgeting time, resources, and expenses for your business, as you continue to grow, you will begin to lose control of your footing. Basic business budgeting helps you to:
- Plan ahead;
- Make sound business decisions; and
- Identify how well your company is performing.
Those business owners who fail to create and implement a budget for operating expenses, sales, or cash flow may feel their business slipping or worse, find they are spending way more than planned.
Business owners who budget well, are reviewing and updating departmental budgets, checking results against original forecasts, and reviewing budgets regularly, not one or two times per year.
Build Tighter Financial Controls
Budgeting helps to build stronger and tighter financial controls within the business. Doing so provides accounting ratios and graphs for key metrics, like expenses. When you view actuals versus forecast on a monthly basis, you can begin to make adjustments more quickly than when it’s an immediate need.
In addition to having overarching business goals, individuals within the business—even the CEO—need goals with targets to measure. Implementing a budgeting and financial control strategy helps identify variances throughout the year that help determine if you’re going to hit the goal mark.
Problems, Thresholds, and Contingencies
Without a budget or internal controls in place, when there’s a negative turn in your industry, or when a high-priced item or services is needed, you have no idea how to pay for it. When these controls are in place, and you’re paying attention to them, you alleviate some of the stress associated with challenges in the industry, unexpected expenses or services, or cutbacks.
Profitability and Cash Flow
Understanding the difference between a profit and loss statement and cash flow are important for business owners. Budgeting and financial controls help with this. The operating statement is what you would think, a snapshot of the business operations or profit at any given time. Tracking cash flow against a forecast provides insight into the amount of liquidity you have at a given time.
Let’s say you own a business and about two-thirds of the way through the year you need to buy an expensive piece of equipment. You aren’t sure where you budget stands as far as profits, or what other expenses you might have coming up in the final third of the year, but you make the purchase anyway. Doing so without having a good idea of your budget or without any financial controls in place could put you, your employees, and your business in jeopardy and may cause you to go into debt in the final stretch of the year.
On the other hand, if you are a stickler for budgeting and have automated tools to assist with financial controls, when a situation like this arises, you can make an educated decision about whether you should buy, lease, or rent the equipment you need.
If you’re running a business, and are not budgeting correctly nor give a care about financial controls and forecasting, you may find yourself in dire straights one day. By knowing what your business is worth and how well it’s doing is like understanding the health of your company, and being able to somewhat predict its future.
If you need help with setting up financial controls or budgets, or need help understanding your profit and loss statement, give us a call. We specialize in small- to medium-sized companies in growth mode.