Elements of Successful Budgets

Budget success depends on several different elements. Including the information provided by each of these elements will help entrepreneurs to create a successful budget:

• Time horizon
• Goals
• Data
• History
• Forecasts
• Variables

Time horizon

The time horizon is the real-time measure of a budget cycle. The time horizon for many budgets is one year. Periods from one week to ten years are used, depending on the nature of the industry, the complexity of the operation, and the degree of risk.

Goals

A budget should outline the specific goals to be achieved. Goals provide benchmarks for accountability and should be specific and measurable. Creating specific goals will guide and focus the entrepreneur’s attention throughout the budgeted period.

Data

Using good data in the formulation of a budget will lead to sound assumptions. If data is not reliable, it will be impossible to accurately predict the coming year. Careful entrepreneurs create a reference notebook to organize the data on which assumptions were based. Doing so will enable data to be referenced easily during budget reviews and revisions.

History

History is an important feature in a budget. A company’s past performance should be used to understand market trends, to establish historical strengths and weaknesses, and to provide a starting point for a new budget.

Forecast

A budget document is a compilation of forecasts. Forecasts should represent achievable, yet motivating, goals. Additionally, forecasts should take into consideration the effects of increased expectations. For example, a forecasted sales increase of twenty-five percent statewide might affect mileage and other travel costs, telephone expenses, and advertising.

Variables

Variables are the factors that influence the success or failure of a forecasted goal. An entrepreneur with a growing business might budget for an increase in revenue, for which she is planning to use more advertising than in previous years. If complications arise in the new budget period, and the revenue increase is no longer reasonable, the advertising budget will be affected and should be immediately adjusted. Include connections between variables in your budget to remind yourself of the dependencies between your various expectations.

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Once you have developed your budget and ensured that it includes all of the success factors listed above it’s time for implementation. Use your budget as a tool to dictate when and how projects and activities will be carried out. Commit to managing your business to correspond with your budget unless your situation changes drastically. If your situation does change drastically, revise your budget and adjust your expectations.

During budget implementation, insightful entrepreneurs who regularly work with employees and contractors allow adequate time for people to adjust to changes brought about by budget decisions. Business owners who are patient during periods of transition, providing proper support and adequate access to resources, quickly succeed at leading the members of their various work and project teams through the implementation of a new budget.

The last, yet possibly most important, element of successful budgets is regular review and analysis. At the completion of each measurable time segment, each month for most businesses, budgeted numbers should be compared to actual results. If a significant variance occurs, it will be necessary to identify what caused the variance and to describe how this variance will be managed in the future. Regular analysis of your documented expectations and rapid resolution of unexpected realities will facilitate and support your success.

— Excerpted from Preparing Budgets by Renaissance Training