As a businessperson and entrepreneur, you and your company have grown together. Your business venture started as an idea, then moved on to planning and execution, and finally – a company with enough potential to attract financing. It might seem as if you have achieved all your goals at this point, but your business journey with your investment partners has just begun. They will want to know that their investment is in safe hands and working hard to earn good returns.
Effective budgeting allows for financial planning and benchmarking and can give your investor peace of mind. To do this, you need good reporting and a well-planned budget. Let’s dive in.
Why is it Important to Prepare a Budget for your Organization?
A budget serves as a fundamental tool in the financial planning for your enterprise, provides a clear picture of your organization’s financial health, helps in making informed decisions, and serves as a benchmark for evaluating future performance. It can also help you to see where any possible gaps or issues might arise down the line.
Steps in the Budget Process
- Setting Objectives: This involves identifying what your organization aims to achieve financially within the budget period. Objectives should be specific, measurable, achievable, relevant, and time-bound (SMART).
- Gathering Information: This involves putting together historical financial data, understanding current market trends, and considering challenges that could impact your finances.
- Developing Initial Estimates: Use this information to project your anticipated revenues and expenses. This step often involves input from various departments to ensure accuracy.
- Review and Approval: The draft budget is reviewed by management, stakeholders such as your investors, or a board of directors. Feedback is incorporated, and necessary adjustments are made before the budget is approved.
- Implementation: After approval, the budget is used as a guide for financial decision-making, helping you to allocate your assets effectively.
- Monitoring and Evaluation: It is important that you compare actual performance against your budget. This allows for identifying gaps and making adjustments to stay on track.
Steps in the Budget Process
Budgeting is a detailed process that involves several critical steps. Each step plays an essential role in ensuring that the budget is realistic, effective, and aligns with the organization’s strategic goals.
- Defining the Period: Decide whether the budget will cover a fiscal year, a quarter, or a month. This period should align with your organization’s operational and strategic planning cycles.
- Estimating Revenue: Forecasting income from all sources, including sales, services, investments, and any other revenue streams. This involves analyzing past trends and considering current market conditions.
- Determining Fixed and Variable Expenses: This step involves identifying all costs, categorizing them as fixed (unchanging over the budget period) or variable (fluctuating with the level of activity or other factors).
- Balancing the Budget: Ensure that total expenses do not exceed total revenues. This may involve cutting costs or identifying ways to increase revenue.
- Review and Adjustments: Monitor actual income and expenses against the budget and make adjustments as necessary, in order to accurately reflect changes in your organization’s financial situation or strategy.
Budgets can serve as a comprehensive financial roadmap, categorizing various types of financial data for effective management and planning. The main categories typically include:
- Revenue, which encompasses all expected income and sets the spending limits;
- Operating expenses, covering day-to-day operational costs like salaries and utilities;
- Capital expenditures for long-term asset investments like machinery;
- Debt service, accounting for all debt-related costs; and
- Savings and investments, earmarking funds for future emergencies or investment and expansion opportunities.
These categories collectively ensure that all aspects of your business’s financial health are addressed, from immediate operational needs to long-term strategic investments.
A budget not only assists in tracking and controlling various financial aspects but provides a clear picture of where funds are being allocated and how they contribute to your company’s overall objectives and growth – a requirement for your investors. This structured approach to finance allows your finance team to balance immediate needs with long-term goals, ensuring sustainable growth and financial stability.
Outsourced CFO services
A detailed and realistic budget is one of the most important tools for guiding your business and ensuring long-term profitability. The team at OCFO knows that budgeting and a healthy cash flow go hand in hand. Founders and management teams need to have a deep understanding of company cash flows to make the most of opportunities while riding out any setbacks. Not all companies have this type of expertise on tap, which is why Outsourced CFO offers cash flow and budgeting overviews and advice as part of our fractional CFO offerings. Our team can help you utilize top tools and approaches to help you forecast money in and money out. In times of excess, cash can be invested smartly. When a shortfall is on the way, you can identify it well in advance and take the necessary steps now to avoid it.
If you need an extra hand in managing your post-investment finances and reporting function, get in touch with the Outsourced CFO experts today. Your dedicated advisor can help you manage your finance function and ease the process of handling greater liquidity post-investment.
