financial budget for your company in 7 steps
What is the financial budget?
The budget or financial budget is the (financial) expression of a company’s operating plan for a given period of time, usually one year. In general, at the beginning of the year, managers prepare a plan detailing the achievements that they want to obtain during the period with respect to income, expenses and net income.
It is one of the most valuable tools that your company can count on because it gives you an action plan both in the short and long term. When used efficiently, it can help you meet business goals, identify warning signs early, and transform your business into a more productive and profitable one for competitive advantage in a challenging market.
Prepare a financial budget in 7 steps
1. Have a strategic plan and defined organizational goals
Before starting with the elaboration of a financial budget, it is important that you stop to carry out some actions that can make all the difference to successfully implement this practice:
a) Establish the financial goals of your company: Setting specific, measurable and realistic goals will provide your financial budget with a real and important objective and will serve as motivation to carry it out. For example, a goal might be to increase net income by 5% by the end of the fiscal year.
b) Analyze the trends in your income and expenses from previous years: In order to have more accurate projections, it is essential that they are based on real information that you have in your company, it is useful to observe how much the average expense has been in each category and the same way you do it with sales.
c) Determine limit amounts for each category of expenses: Estimate the percentage of your income that you ideally want to spend on each category before preparing the financial budget, this exercise will help you a lot to prioritize and have a more complete vision of the destination of your income and what it can contribute to the achievement of your business objectives.
2. Forecast sales or revenue
The first piece of information you must have is the amount of estimated sales. To determine this number, it is essential that you take into account some factors that influence it, such as:
a) Estimated demand for the product or service.
b) Target market.
c) Direct and indirect competition.
d) Average market price of the product and/or service.
e) Production capacity.
You can estimate 3 main scenarios: low sales, moderate sales and high sales. The goal of the sales forecast is to make the best possible estimate based on the information that is currently available, in this way you will be ensuring that your projection is as close as possible to reality, this is of great importance since on this data is that decisions are made in different areas from production, purchase of raw materials to hiring personnel.
There are several methods to make a sales forecast , among others are the following:
a) Historical data: It consists of taking into account the sales of previous years and analyzing the trend, for example, if in past years there has been a 10% increase in sales, it would be predicted that they will continue to increase at the same rate.
b) Market trends: In this method, what is taken into account is some indicator or statistic of the sector or market, such as the Consumer Price Index.
c) Potential market sales: To carry out a forecast based on this criterion, the total sales that are estimated to be generated in the market in which you compete should be considered, thus based on your ability to production and distribution will determine what percentage of that total you could achieve.
d) Personal judgments: Under this modality, what is carried out is a survey with specialized people, it can also be based on your own experience in the business, asking your employees directly related to sales, etc., in this way can be able to estimate the sales trend.
3. Budget expenses (fixed and variable costs)
For every company it is important to have tools that allow you to have control and monitoring of the investments made and the outflows of money, that is why the financial budget of expenses becomes important. In this way you will be able to detail each one of the expenses and dispose of your resources in the most efficient way. To estimate it, it is essential that you consider the following points:
a) General expenses of the company , divided by fixed (water, electricity, payroll, etc.) and variable (selling costs, administrative expenses). It is preferable to identify them by department to have a complete view of what is spent in each of the areas.
b) Planned projects in which investments are contemplated, regardless of whether they are small in size or large and important plans.
c) Contingencies: It is crucial for a company to have a certain amount for any unconsidered expense that may arise during the operation, this can be the difference between the solvency of a business or a major liquidity problem.
This financial budget should generally be made annually, although it may be semi-annual or quarterly depending on the needs of the company, the industry in which it operates, etc., however, it is essential that it be detailed on a monthly basis. to be able to monitor and control expenses more efficiently, in order to prioritize and evaluate the effects they generate for the company.
4. Forecast cash flow
The projected cash flow is a basic tool for financial management, with it the most efficient use of the cash available to your company is planned, seeking to maintain balances close to the money needs that the company requires for its correct operation. This planning helps to prevent the fulfillment of the organization’s obligations towards its suppliers, creditors and personnel from being jeopardized or, on the contrary, there being idle cash that is not generating any profit.
When it is positive, it indicates that the company has sufficient financing for the operation, otherwise it would require additional financing that could come from the shareholders or from a bank loan.
This report is also known as a cash flow budget and can be done by two methods:
a) Indirect method: Under this criterion, the flow is divided into 3 categories: operating flow, investment flow and financing flow. To be able to do it with this method, it is necessary to have the balance sheet and income statement for the last two years.
b) Direct method: In this case, the cash received and the cash payments made through the operation of the company are identified. The cash received minus the cash that went out gives you the net cash from the operation, which is equivalent to the net income with cash accounting.
5. Structure the financial budget of all areas of the organization
As part of the process of implementing budgets in the company, it is essential that each of the operating areas has its individual budget to make control and monitoring easier, which in turn will help to comply with the financial budget. organizational.
When implementing budgets for each area of operation, there are advantages such as the following:
a) Motivation and challenge for employees by having to meet specific goals and achieve the objectives of the financial budget to add value and collaborate in obtaining the overall goal of the company.
b) Provides responsibility to each assigned person regarding the most efficient management of resources.
c) Helps autonomous decision-making of each area manager.
d) It prevents operational objectives from being manipulated by those in charge.
e) Consolidates the organizational structure defining authority and responsibility.
f) Promotes planning and anticipation of situations that may arise.
g) It shows important indicators such as: sales efficiency, productivity, efficiency by department, use of resources, achievement of goals, unnecessary expenses, etc.
6. Schedule regular follow-up reviews
The first step in carrying out a review process of the financial budget is to examine the current one and compare the estimated amounts with the actual expense and/or income that was had. If there are items that are constantly out of budget to the detriment of the company, they must be re-evaluated and reviewed individually.
It is worth mentioning that the financial budget reviews are not a one-time or unique activity in a period of time, so that your business is well managed, reviews must be carried out continuously in a cycle of continuous improvement, always seeking the highest profitability without diminishing the quality of the products or services offered by the company.
7. Take actions regarding variations in results vs. financial budget
As the budget reviews are carried out, the real situation and performance of the company is faced according to the resources allocated in it, when a deviation is detected, it is important that the pertinent actions are carried out to correct it and identify the areas of the company that are not being efficient in the management of assigned resources, determine priorities and make the necessary adjustments so that they are fulfilled in a timely manner.
It is critical that during this process you analyze in detail whether the deviations presented are due to mismanagement by the personnel in charge , to an extraordinary event that occurred during the period or even if it is valid to re-evaluate the expense policies or sales estimates to confirm that you are budgeting correctly based on specific, realistic, measurable and achievable objectives in the given period of time.
Financial planning through a budget will give the organization a more orderly operation by taking advantage of opportunities and financial resources, foreseeing the needs of money in advance and prioritizing its application seeking the highest profitability. By having the SAP Business One ERP as your ally, you will have a great tool to generate the most reliable information that will help you make your financial budget efficiently and thus achieve a profitable and productive company that works like a perfectly coordinated machine.
Request the SAP Business One Demo . It is completely free and you have no commitment to purchase the software after trying it. With the Demo you will be able to realize first hand how SB1 can be adjusted to the needs of your company .