For those new to accounting, the process of preparing budgets in addition to cash-flow forecasting are very helpful and useful habits to get into. Budgeting is a crucial element of any business and is also utilized for personal financial planning. This approach is forward-looking and helps to plan the amount required to cover various business needs.
What are Fixed and Variable Costs?
To carry out budgeting, one must first understand the differences between fixed and variable costs. Fixed costs refer to things that are likely to remain very stable, such as when owning a small shop, where fixed prices would include a similar amount of electricity being used each month or quarter.
Variable costs are simply costs that may change; for example, if Mr. Smith sells a large amount of stock one month, there would need extra money to replace that stock. The amount one spends depends on the amount of stock sold, described as a variable cost.
Microsoft Excel for Budgeting
In addition to other computer packages, Microsoft Excel can prepare both budgets and cash-flow forecasts using a spreadsheet. Spreadsheets are helpful within accounting as they may be altered to reflect any changes in business finances.
How to Layout a Budget
As aforementioned, they are using a spreadsheet as an effective means of laying out a budget report. The first heading is the estimated budget, the actual costs, the variance, and the likely reason for the conflict. In the vertical column, there should be two headings, namely direct expenses and other expenses. Direct payments include materials and labor costs, whereas different prices may consist of additional charges such as administration fees or advertising.
Aims of the Budgeting Process
The main aim of the budgeting process is to analyze the actual business performance by undertaking this method. It means that one may then be able to work out where the money is being lost and identify which areas need to improve for the business to succeed.
What is Cash-Flow Forecasting?
Along with budgeting, cash-flow forecasting is an essential aspect of business management. It is a type of financial forecast that may show the predicted amounts of cash coming in and going out over the next few months. Ideally, this approach should be carried out at a regular interval to anticipate the cash book totals.
Cash-flow forecasts are directly related to the budgets. The significant difference is that this includes various changes required to have timing estimates when money comes in or goes out.
As highlighted above, the budgeting process requires knowledge of both the fixed costs and variable costs associated with an organization. Excel is a helpful tool to layout a budget using a spreadsheet, and the main aim of budgeting is to analyze business performance levels and identify any weak areas.