The budget is not only important for future decision making but for day to day decisions as well. To be able to use it this way, you must monitor it frequently by comparing your actual income and expenses versus what you had budgeted.
When you notice differences in actual performance compared to your budget that is major, consider what caused the variance and what action you can take if the variance is negative or positive.
To give you a look at how you can go about this process we will take you through four types of variances that can occur in your business and the kind of decisions you can make to remedy.
1. Sales aren’t coming through
Sometimes the projected sales fall short of what was expected due to unforeseen circumstances; maybe a new competition came in or business was just slow. What this means is that you will have a stock in excess of what you had expected.
This needs to be followed up by decisions that will enable your business to perform better; your options may include changing the sales strategy or buying less stock than was budgeted for the next month.
2. An employee disses you
Maybe you had a bit of a tiff with one of your employees and they ended up walking out on your business. What does this mean for your business? Can the work be done without him/her? Can those left do additional hours? Do you need to budget for overtime?
These are all possibilities that can arise based on losing an employee. This will determine whether the positive change in your budget will be a temporary one or a permanent one depending on how it affects the running of your business.
3. Your landlord is acting up…
Unfortunately, this happens quite often than we would like to think about; worse still, you might not even get enough notice to organise yourself if the landlord increases the rent at the last minute. Based on the overall outlook of your budget, you can decide if your business can sustain the costs of an increased rental expense.
The options you might have would be to negotiate the exact amount of increase or when the new rent amount can be effective to give yourself time to plan. You might also opt to look for more affordable space elsewhere, which may lead to double charges in the month of booking and moving.
4. Repair expenses went up
Your loyal van is coughing, your mechanic is charging more for his services based on your desperation. Repairs will be higher than usual. You may not have very many options here except maybe try and find out if the rates are competitive and if it warrants you looking for another mechanic.
If this specific expense is on a continuous rise then you might consider getting another van to reduce the monthly expenses. A new van brings in a whole other dynamic to your budget and your financial accounts.
In addition to giving you a picture of how your business will look in the future, budgets play a key role in the day to day decisions. It is important to constantly monitor the difference between the budgeted expense and the actual expense and make decisions accordingly. Remember that the decisions should be based on the overall outlook of the budget and how one decision will affect another aspect of the budget. Consider the budget holistically and not as standalone budgeting decisions.