FINANCIAL MANAGEMENT - BUDGETING

This is the 44th of a series of newsletters published on Business Management and Management Skills. Not all topics will apply to your business, but each section will be beneficial to establish company goals and objectives. By reading and studying these newsletter articles, you’re taking the first step in achieving your goals.

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Establish your firm’s financial goals as realistically as you can, taking into account:

Determine your objectives and then prepare a financial budget. This becomes your firm’s financial statement for a fixed period of time (usually one year). It’s based on estimates of expenditures for each business function, and includes direct costs and overhead, plus an estimate of anticipated sales volume necessary to cover the expenditures and leave the desired net profit.

New businesses will require the use of estimates, which may later prove to be little more than wishful guesses. Established businesses will have a history to draw upon from which accurate projections of income and expenses can be developed. The following questions are well worth the time it will take to correctly answer them:

As you receive your quarterly financial statements from your accountant, use them as a guideline to see how closely your progress is adhering to budget, and to make any necessary changes in planning, policy or objectives. Income statements are results; budgets are scorecards comparing established goals to actual performance. Comparing what you thought you could accomplish with what you actually accomplished can be a very humbling and motivating task.

Your supply of cash influences every aspect of the financial health of your company. Know what your cash balance is at all times. Don’t overlook the importance of billing and collection as discussed in other sections, which will help you maintain an adequate flow of cash. When more cash is available, budgets can be more liberal. Some owners read the record of billings, sales, deposits and checks written every day before they do anything else. These amounts are vital business condition indicators and tell them what areas require their attention each day. Business today must be run by the numbers, not by gut-level feelings. Know your numbers, your business health numbers, cash, accounts receivable, accounts payable, backlog, etc.

Keep excess operating funds working at all times by placing them in savings accounts or other investments where they will earn a return, until you experience a delay in getting full payment due to billing approval delays, retainage, or slow collection. Where projects are to be delayed for long periods, review your contract and begin to develop a change order so that you can get paid for additional costs arising from material inflation.

With proper forecasting and budgeting techniques, you’ll be able to figure out what’s needed to cover debt service cost. Once the budget is established, decide if you’re going to do something, or who’s going to do it, how it should get done, and then continue to track income and expenses by percentages. Once you get a job, forecast billings and collections to determine when to anticipate money coming in. It’s difficult to predict cash flow, but with planning and plotting you can estimate or learn to anticipate cash-flow trends. The monitoring of your firm’s current cash condition is vital to continued operations.

Maintain records of billing and deposits, cost per day, etc. Determine your billing cycles and keep records accordingly. The added effort in maintaining these records will pay off by providing you with accurate figures for future bids and compensation for the lean times. You want to know where you are, where you’re going, and when you’ll get there. Look to history and keep good records. They’re good sources of guidance for producing future projections.

NOTE: For additional information, please refer to the section on Accounting (#38) in this series of articles on Financial Management.

Mike Holt’s Comment: I would like to extend a special thank you to L.W. Brittian, a Mechanical & Electrical Instructor in Lott, Texas, for reviewing and editing the various articles in these newsletters. His comments and suggestions have been invaluable in the preparation of my Business Management and Management Skills’ Workbook. This newsletter article was extracted from that workbook. Watch for our next newsletter, and as always, we invite your comments and feedback. Send us your real-life experiences. We value your opinions and participation. Please respond to Barbara@mikeholt.com. And be sure to visit Mike Holt’s Website at http://www.mikeholt.com

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