For those new to accounting, the process of preparing budgets in addition to cash-flow forecasting are very helpful and useful habits to get into. Budgeting is an important part of any business and is also utilised for personal financial planning. This approach is forward-looking and helps to plan the amount required to cover various business needs.
What are Fixed and Variable Costs?
In order to carry out budgeting one must first understand the differences between fixed and variable costs. Fixed costs refer to things that are likely to remain very stable, such as in the case of someone owning a small shop, where fixed costs would include a similar amount of electricity being used each month or quarter.
Variable costs are simply costs which may change, for example if Mr. Smith sells a large amount of stock one months then there would need to be extra money spent on replacing that stock. The amount one spends depends on the amount of stock sold so this is described as a variable cost.
Microsoft Excel for Budgeting
The Microsoft Excel, in addition to other computer packages are able to help with preparing both budgets and cash-flow forecasts through using a spreadsheet. Spreadsheets are helpful within accounting as they may be simply altered to reflect any changes in business finances.
How to Layout a Budget
As aforementioned, using a spreadsheet is an effective means of laying out a budget report. In the first heading at the top is the estimated budget, then the actual costs, the variance and the likely reason for the variance. In the vertical column there should be two headings, namely direct expenses and other expenses. Direct expenses include things such as materials and labour costs, whereas other expenses may include additional costs such as administration fees or advertising.
Aims of the Budgeting Process
The main aim of the budgeting process is that through undertaking this method one is then able to analyse the actual business performance. This means that one may then be able to work out where money is being lost and identify in which areas things need to improve in order for the business to be a success.
What is Cash-Flow Forecasting?
Along with budgeting, cash-flow forecasting is an important aspect within business management and is basically a type of financial forecast which may show the predicted amounts of cash coming in and going out over the next few months or so. Ideally, this approach should be carried out a regular intervals in order to gain a prediction in relation to the cash book totals.
Cash-flow forecasts are directly related to the budgets with the significant difference being that this includes various changes required in order to include timing estimates of when money comes in or goes out.
As highlighted above, the budgeting process requires knowledge of both the fixed costs and variable costs associated with an organisation. Excel is a helpful tool to layout a budget using a spreadsheet and the main aim of budgeting is to analyse business performance levels and identify any weak areas.
Source:
Truman, M. & Lloyd, D. (2006) Teach Yourself Small Business Accounting London: Hodder Education
Kate Le Page - Kate Henning-Le Page writes about eating disorders, body image and recovery issues. She specializes in anorexia recovery.
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