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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Is your small business is on track? Check your budget.

Last week I talked about Be Prepared – Have an Emergency Fund.  If you missed that post, you can review it HERE.  This week’s post: “Is your small business is on track?  Check your budget”.  You seem to be making money.  At least that is what your income statement says.  That is good, if you have included all your expenses.  You can know for sure if you have a well prepared budget.  Learn more in this week’s blog.

 

Your income statement says that you are making money.  But are you on track?  Are you making what you need to so you hit your profit goal for the year?  Did you miss something so your numbers are wrong?  These are some of the questions that you can answer with one simple check.  Compare your income statement to your well prepared budget.

You want to make sure that you have your numbers correct.  Your priority is not doing the accounting for your business, it is actually running your business.  Even with the great small business accounting programs that are available to you, after you think you have entered everything,  the income statement alone will not show you whether everything is there or not.

That is where a well prepared budget comes into play.  When you are creating your budget, part of what you do is make sure that you have included all of your normal expenses.  If you have done a good job of doing that, you are able to compare your budget to your income statement to see what variances or differences you have on the report.  If you have entered your budget into your accounting program, which I highly recommend, the comparison begins with running your income statement in the format that includes the budget comparison.

Once you run the report, go through it and highlight the big variances.  If you don’t have any large variances, congratulations, you probably have done a good job of running your business and preparing your financial statement.  That usually is not the case, due to the fact that when you are creating your budget, you don’t know what is going to happen in the future.  You can get close if you have a well established business and don’t have any major events throw you off for the month.  But typically, there is something you are going to have to take a look at.

Start with the biggest variances first.  You could be either higher than budget or under budget.  If you are higher than budget, check to make sure you didn’t record something twice.  That is a typical error that even accountants make occasionally.  That is one of the reasons that you want to do the budget comparison with your actual month results.

If the variance is under budget, you will need to check to see if something is missing.  It could be a bill for an order on a job that hasn’t come in yet.  It could also be some income that you didn’t record.  A basic principle of accounting is called the matching principle.  That basically means that you want to keep the income and expenses that are related to each other in the same period.  Said another way, if you have a job that you recorded income for in a month, you should also record the bills that go along with that job in the same month.  This keeps your business from looking like it is doing great one month, (the month you booked the income) and really poor the next month (when you book the expenses). 

Another aspect of recording bills has to do with items that come up periodically.  This could be a license fee or insurance payment.  When that bill is due and you include it in your well prepared budget, if it doesn’t get recorded you could think that you had a really great month.  You could make decisions that you wouldn’t have made knowing that the bill wasn’t included in your income statement.  By doing your monthly comparison, you will be able to see by the variance that the bill was due.  You can then take steps to get that corrected and you will have better information on your income statement for making your business decisions.

Ensuring that your business is on track is another benefit of having a well prepared budget!

If you know someone this post will help, please share it with them!  Then scroll down to the comments section and leave me a comment on this post.  If you aren’t already a subscriber, sign up to receive notification emails and information on other promotions!

God Bless your week!

Copyright

© 2018 Dan Heiland 2018 Kat Heil, LLC

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