Conducting a Budget Analysis
Budget analysis is making decisions about a company’s financial resources by using available information and comparing different alternatives. According to entrepreneur Alexander Djerassi, the decision-maker must make an informed choice to succeed in business. Budget Analysis is one of the most important activities that every organization has to undertake at least once in a year. Most organizations get confused with budget analysis and do not realize its significance to be done in an organized way; there may be many reasons why an organization performs a budget analysis.
a) Define scope: Before starting with the actual budget analysis process, you need to define the scope of an investigation. Depending upon an organizational structure and the type of financial data available for the business, one should consider doing a detailed analysis for one department alone or taking a broader approach by analyzing the entire organization together.
b) Determine the nature of the problem: The first step towards solving any problem is finding out what exactly it is. Regarding developing a business-level budget, certain key factors are required to be considered. These include revenues, expenses, assets (including cash), liabilities, capital expenditures, inventory and fixed assets. In addition, you must factor in the cost of goods sold and variable operating costs.
c) Prepare a forecast: Preparing a forecast for the coming year depends upon gathering already known information and identifying new opportunities. An effective budgeting process includes making predictions about anticipated changes in the economy, customer preferences, technology, etc. Once a forecast has been completed, the results are analyzed to determine the feasibility of implementing the proposed actions. The purpose of forecasting is to provide estimates about the probable revenue and expenditure patterns for the next coming months based on past experience. If you know about your current plans, you can easily predict the probable change over time.
d) Calculate the amount needed: The amount of money necessary to implement the defined objectives of the annual budget requires careful consideration. All the figures that have been used up to now must be taken into account.
e) Establish priorities: Once all the plans and forecasts are done, it is time to establish the order of importance of each activity in terms of its impact on the outcome. For example, setting the priority levels for increasing sales versus reducing expenses is crucial because the final result of these activities depends on how they interact with each other. This means that every decision is critical and can affect the whole plan.
F) Analyze revenues and expenses: Once a budget is ready, it is time to analyze the current status of revenues and expenses. This involves calculating each function’s total revenue and expense and comparing them against the target amounts outlined in the budget analysis.
g) Develop a strategy: Finally, once the budgeting work is completed, the next task is to develop a strategy based on the findings of this exercise to achieve the desired business goals.
According to entrepreneur Alexander Djerassi, the bottom line of a budget indicates whether or not the budget will meet its intended purpose. A successful budget usually contains two essential elements–revenues and expenses.