How to increase the financial standing of the company through budgeting
Budgeting does not directly affect the financial standing of the company, however, it allows you to set financial goals and track deviations from the plan.
Analysis and assessment of key financial indicators, their changes and deviations from the planned - this is what allows you to influence the financial standing of the company. Therefore, many businesses live by only regularly tracking results - often this is enough, while theoretical planning may be a waste of time.
If you decide to get serious about budgeting, you need to answer a number of questions:
- What indicators to plan. You should not be limited only to the income indicator, but don’t plan too much at the first stage either.
- For what period to plan. Assess the possibility and feasibility: month, quarter, six months, a year? Choose the option that suits you.
There are two basic principles of planning:
- From income - we indicate how much we want and can earn, and what percentage of profit we expect to receive.
- From expenses - we determine the level of expenses and, through the coefficients, we derive the required level of income from it.
Both principles have their pros and cons for different types of business.
Speaking of the planning period, in our business we have a strategic horizon - up to 5 years. Key indicators: revenue by business lines, profit, number of employees, number of clients and other production indicators.
Cost planning is very individual. It always requires considering the specifics of business. In our business, we are guided by the following principles.
The first principle is separate accounting of direct and indirect costs:
- expenses for the provision of services to a specific client or business line (including salaries, taxes, etc.) are accounted for separately and deducted from the results of this line,
- general expenses (rent, telecommunication expenses, salaries of administrative personnel) are divided proportionally on a constant basis (the ratio of income, direct costs or physical parameters, for example, the area occupied by the business line, etc.).
The second principle is to track the share of expenses from revenue, the share in the group of expenses (for example, the share of administrative staff salaries in all indirect costs), and changes in this share. The main thing to remember here is that there are no trifles, and a change of 1% may profit you or, vice versa, turn out to be a loss.
We are also guided by the following rule: the more detailed track of expenses (if possible) – the better, because it is always easier than pulling out certain articles from the general report post factum.