What Big Business does with a budget that most households don't
What key
business tool is rarely used by households even though it would improve their financial position almost immediately? The
budget review! In business, an estimate is made of every aspect of the expected annual income and expenses for the coming year, to create a budget. These estimates are split up into various accounts for each month and recorded as either “Income or Revenue” and “Expenses or Costs” (the terminology may vary from country to country, but the principle is the same).
At a designated time, weekly, fortnightly or at the very least, monthly, the
actual income and expenditure is compared with the
budgeted figures, and the difference, if any, examined – to find out why, for example, the budget figure for vehicle running costs for the month of July was $8,000 and the actual cost was $11,000 – an increase of $3,000 in costs in just one month.
This kind of regular review allows businesses to identify trends such as:
§ A sudden drop in sales of a particular product line (not good)
§ A sharp rise in income from an unexpected source (could be good if it’s legal)
§ Expenses increasing in an area not expected to fluctuate (not good)
§ Major blow-outs in costs over a short period of time (never, ever good)
By monitoring these trends the business has the opportunity to:
§ maximise income opportunities e.g. heavily promoting a product line to increase sales or
§ take immediate action to cut costs in a trouble spot.
Without this regular budget comparison, in a short time the business could go from expecting a healthy profit, to having the bottom fall out of everything, with no time to take corrective action.
Yet this is the situation most households are in – many with no budget at all, and those with a budget not taking the time to review it, at least monthly, to identify opportunities for saving and areas where costs could be cut quickly and easily.
Every successful company has an annual budget and monitors actual income and expenditure against that budget. Rarely are there any surprises at the end of the year, and money is usually available to run the business, as well as for fun things like the Christmas party.
If you don’t have a budget, make one – now. If you do have a budget but don’t review it, shame on you. This is a
must - and make any necessary adjustments immediately. After all, you do want money for your own Christmas party, don’t you?
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