By Ali Waterman | Harkcon’s Financial Specialist
When running a small business, a budget is a great tool to help manage expenses and forecast cash flow. Setting up a good budget can help make strategic financial decisions while minimizing the time you spend tracking expenses. Here are 5 tips to creating and managing an effective budget.
Use Your Accounting System – A great way to set up a budget is to align it with your accounting system. Your accounting system will have a chart of accounts that track different types of expenses based on accounting standards in your industry. Instead of coming up with new budget lines, use the same ones that are set up in the accounting system. When it comes to reconciling your budget, having the same accounts will save you time when mapping actual expenses to your budget. Bonus Tip: Some accounting systems have budget tools built into them, like QuickBooks. If you don’t need a customized budget, this is a great way to create a budget!
Group Budget Lines by Expense Type – Budgets can have lots of expense lines and can look overwhelming if listed in one big spreadsheet. To help manage different types of expenses, it’s useful to make groups based on your company’s needs. For example, government contractors need to track G&A (General and Administrative), Overhead, and Fringe expenses. Grouping your budget by these categories will make it easier to clearly see what expenses fall under each category. Other categories you may want to create are labor vs. non labor expenses, direct vs. indirect expenses, or COGS (Cost of Goods Sold) and other expenses.
Compare Projected Expense and Actual Expenses – When creating a new budget, it sometimes can be very difficult to project certain expenses with accuracy. Projecting expenses is extremely important in order to forecast your company’s financial health. By comparing your projected budget to what you actually spent each month, you will be able to refine your projections for the future based on how accurate your projections were in the past.
Set a Schedule to Update your Budget, and Stick with It! – An important part of managing a budget is updating it on a regular basis. If you set up a budget that aligns with your accounting system, updating your budget should be a breeze and not a hassle. Setting a schedule to update, analyze, and make adjustments will help keep you focused on your financial goals with your budget. Put something on your calendar to help remind you, and make sure to do it every month!
Keep it Simple – No one wants to manage a budget that is complicated and time consuming. When setting up a budget, remember to keep it simple. Opt for less expense lines than more. Make formulas do the hard work for you. The simpler the budget is, the easier it is to manage!
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