You are probably asking yourself what this thing called the ‘’budget cycle’’ is. You have heard about the budget and how it works but you are less likely to have heard about the budget cycle.
The budget cycle simply refers to the phases or stages that you should go through while working on the budget for your business. Following this step-by-step process will help you make sure that your budget is actually beneficial to you and not just a dreaded process.
This is the very first step of the budget process and is highly dependent on what you want to see happen in your business within the period that is relevant to your budget. Three questions you need to ask yourself
- What do I plan to do and achieve?
- How much money do I have to spend?
- What method will I use to budget?
Obviously, you can only budget to spend money that your business already has or is expecting to get. You can project your sales based on past performance and consider that as expected revenue in your budget.
The methods for preparing and presenting business budgets vary and are as many as there are businesses. If you haven’t been budgeting for your business though, this is a simple template that can get you started.
This is where you get your hands dirty and prepare the actual budget. The past performance of your business and what you want to do in the year should drive this stage of the process. Also, consider engaging other pertinent people for your business. For example, your suppliers’ credit policies will determine how much you intend to pay out to them at what time.
Carry out this process on a monthly basis before coming up with a full year budget. Just as with the financial accounts, have your budget reviewed by external parties and make any necessary changes and then communicate the final budget to all stakeholders.
This is also referred to as the monitoring phase. We mentioned earlier that the budget is not meant to be 100% accurate. The monitoring needs to take place at periodic intervals e.g monthly; it involves comparing the budgeted numbers with the actual numbers. This step is important for three reasons:
- Helps you compare what you estimated with what is actually happening
- Helps you pinpoint why things are not going according to plan
- It’s an opportunity to react to the costs and respond to them
In a case where the first two months monitoring process shows that the sales budgeted are less than the actual sales because business was slow, then you can consider whether you need to order as much stock as you had intended to or you could decide at that point to try a new technique to increase the sales.
Similarly, if the rent expenses go up because the landlord increased your rent at the last minute you can adjust the budget accordingly for the subsequent months.