A budget may be defined as a financial statement of the total estimated revenues and the proposed expenditures of a business organisation in a given period of time, usually one year.
A workable budget is a budget that the items of revenue and expenditure are understandable and easy to implement as it relates to a particular type of business irrespective of capital involved.
Every business owner knows that having a budget you can stick to is key to the management of a successful business. Highlighted below are some of the key things small business owners need to know about workable budgets:
Wrong Assumptions About Workable Budgets
1) Newly established micro and small businesses do not need workable budgets.
2) There is a high level of mathematical skill required to handle workable budgets.
3) Most business owners don't have the discipline to handle workable budgets.
4) It consumes time.
5) A workable budget restricts your business decisions.
Components of Workable Budgets
1) Revenue List
2) Expenditure List
3) Expenditure Tracking List
Importance of Workable Budgets
1) A workable budget helps an organisation to formally translate its organisational objectives into specific plans, tasks etc.
2) It shows where there is efficiency and inefficiency in the organisation.
3) It gives a clear picture of a business at each point in time and this makes decision taking easier. Also, it is a useful tool for performance monitoring.
4) It motivates employees to participate in establishment of goals and plans.
5) It reduces the chances of fire-brigade approach in the running of the business.
6) It helps to achieve co-ordination between various departments and functions of the business organisation.
7) It helps in maximizing savings and investments.
How to Create a Workable Budget
This involves a complete understanding of how revenue is going to be made, all the expenditures involved and a detailed tracking of all these expenditures.
1) Establish realistic assumptions in estimating items of revenue and expenditures with their corresponding amounts.
2) Break the revenue and the expenditure into different categories. For example, revenue that comes once in a while can be categorized as capital revenue and the other regular revenues can be categorized as recurrent revenue. Using the same approach divide your expenditures into capital and recurrent expenditures.
3) Tabulate the items of the budget, using a 12 month period
A) Draw first column for revenue.
B) Draw second column for expenditure
C) Draw third column for actual expenditure.
D) Draw fourth column for differences/variance.
It is in the fourth column "Differences" that you record the differences between the budgeted and the actual expenditure. This could be positive when budgeted is more than the actual but negative when the actual is more than the budgeted.
In conclusion, a workable budget is fundamental to driving a successful business. You may want to consult an accountant to help you create a workable budget or you do it yourself with some free budget worksheets and templates available online.