Developing a monthly operations budget can help the owner and key management team analyze the operations against a pre-determined benchmark.  This practice will highlight operating problems, allowing for any needed corrections before they become larger problems in the future.  By including your key managers in the budgeting process you can greatly improve the final product.  They have the experience and understand the challenges they are facing every day.  They also may have that one innovative solution that can save your company dollars well into the future.

Budgets should include percentages against the total revenues of the organization and have a section for ‘comments and assumption’.  Each budget should be analyzed against actual performance on a ‘line-by-line’ basis from the profit and loss statement.  Each line should have a variance column reflecting how actual performed to budget. 

Using the budget as a financial analysis tool, you can identify where your organization is performing above the estimated budget and possibly duplicate those positive actions throughout your organization.  You can also identify where your organization is under-performing to budget and either correct a miss-calculation on your budgeted profit and loss statement or identify an area where you need to improve and correct an immediate problem.  

Not only will you be able to benchmark against your budgeted profit and loss statement, you can also benchmark against a budgeted cash flow statement allowing you an insight to what your cash needs will be on a monthly basis.  Each of these budget statements should reflect any seasonality your business may experience.  Having this information will also greatly improve the quality of your discussions with your lender.

Let me know what you think.

Take Care

This entry was posted on Sunday, April 12th, 2009 at 7:11 am and is filed under Financial Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.