1st CHICAGO ACCOUNTING

Profit Building and Bookkeeping Course

Budgets

You are going to learn how to make budgets fast and without a lot of effort. You will learn budgeting is a tool and process that is on-going. You will learn how to use budgets to increase your profits.

Most business owners do not know how to use budgets. Typically business owners think a budget is something you do once and then put into a drawer. Well, that is not what they are for. Budgets are a road map to your financial goals.

Here is how large companies use budgets. They create a budget and then provide the earnings estimates to the financial analysts and stock brokers. Then the company’s management is responsible for reaching those goals. We have all seen the financial news when a company misses their quarterly earnings, and the company stock gets crushed. It can appear odd if company misses earnings by a dime and the stock gets crushed. We will explain why this happens. The company creates the budget and the shareholders hold the management responsible for making it happen. So then companies then hire internal financial analysts to analyze their actual results to their budget. Their job is to investigate the variances between the actual results and the budget goals. They have to find out why there is a difference. They have to know what is causing the variance. Then the financial analyst brings the data to the management team and management is responsible for fixing what went wrong. So this is why when a company misses earnings the stock gets crushed. Management is expected to make the earnings projections happen, and when they do not, the investors interpret it as they are not fixing the issues. 

When I was at Sara Lee, my job was to create the budgets for one of their subsidiaries. This subsidiary was just over a 90 million dollar company. I would create 7 or 8 budgets per year for them and then compare the actual results to the budgets and prior year. The first budget was called the AOP, which stood for Annual Operating Plan. So I would create the AOP in October for the coming calendar year. The problem you have when creating the AOP or a budget is that it is created on your assumptions or your best educated guesses. Well no matter how good you are, no one can predict the future with any accuracy. So, as soon as your budget is done and printed, it is obsolete. However, the financial goals are not obsolete, and you have to make them happen. So after the 1st month of the budget when compared to the actuals, somethings are going to be different. You need to investigate what did not go as planned. So you will have to examine the current market conditions and determine the changes you need to make in your budget, in order to get to your net income goal. So you will have to examine the current market conditions and determine the changes you need to make in your budget to get to your net income goal. For example, your sales could be lower than you budgeted, or maybe your cost of goods sold was higher than you planned, which lowered your gross margin. The point is you have to adjust your budget going forward to adapt to the current market conditions. You will have to make changes to the budget in order to make your quarterly net income goal. Your goals do not change, or I should say should not change. You will need to change your budget to get back on track to your original goal.

So a budget is simply a roadmap of your financial goals, and the primary objective of this roadmap is so you could end at your financial goals. So you need to analyze what went right and what went wrong and redraw your route on the map, so you end up where you want to be. So budgeting is not a one and done, but it is an on-going process.

Now, this might sound like a lot of work, well it is not that much work; once you know the short cuts. With today’s off the shelf accounting software like a QuickBooks, this can easily be done, and once you know a few tricks, you can create a budget rather simply.

QuickBooks has a budget template which you can enter the data in month by month or you can make QuickBooks populate the budget with last year’s data. Populating the data with last year’s data is an excellent way to create a budget fast, and that is a pretty accurate starting point. Then you can go back into the budget template and adjust it. Even better, you can create the budget off of last year’s data and then export it to a spreadsheet and tweak it there. Then once you are done making your changes to it, you can then enter your changes into the QuickBooks budget template. 

 

The reason you want to have the budget data in QuickBooks is that QuickBooks has great reporting functions. It can create budget comparison reports with a couple of mouse clicks. This is a very powerful tool and it is already built into QuickBooks. One great function of the software is that it has a feature of a magnifying glass. The mouse pointer changes from an arrow to a magnifying glass when the mouse cursor travels over a number. When the cursor changes to a magnifying glass, you can then click on that particular number, and it will zoom to the detail of the number and often to the source of the transaction. This gives you much more information, like the vendor, the detail that adds up to the amount, and other descriptions. This is a great feature that allows you to zoom to the detail of the actual data. For example, if office supplies were budgeted at $1,000 for the month and you spent $1200. You can click on the $1200 and see the details that add up to that number. This is a very powerful feature, and you have financial analyzes at your fingertips. Having the ability to do this is so powerful, very fast way of getting information, and inexpensive.

 

QuickBooks also allows you to do Profit and Loss Comparisons with the prior year data. This is a very nice Report/feature because you do not have to do all of the set up work as required in a budget. I use this report a lot, especially during my busy tax season. It allows me to see the revenue of the current week compared to the same week last year. I can then click to see which clients I did last year and it helps me plan the week, and it is my goal to out-perform the prior year. The report is called “Profit & Loss Prev Year Comparison”. This is a very powerful tool for you to analyze your business compared to the prior year, super cool.

Free Download Here

Address

1st Chicago Accounting, Inc.

Telephone

© 2018 By 1st Chicago Accounting, Inc.