The role of accounting in Management

7. Budgeting

Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income. Imagine a budet to be your income in cash, that you devide into several envelopes, of which each represents a budgetline. When spending money you remove the amount from the corresponding envelope. Once it is empty you can no longer spend in the category of that envelope, unless you take the money from another envelope. You need to be aware that higher than planned spending does not increase the income, but tightens the budget in other areas.

To help you setting up a budget you can find a simple excel budgeting template under resources.

The process of budgeting involves several steps:

1. Setting your goals: how much do you want to earn?

2. Identify income and expenses. In order not to forget any expenses it is best to follow the pattern of your expense accounts. On the income side it is advisable to work with conservative estimates, while on the expense side you should also include possible seasonal expenses, emregencies, and unforseen contingencies. Be realistic!

3. Design your budget. Devide the expected income accross the areas where you expect expenses. Allocate sufficient amounts but make sure to stay within the total available amount. It might be necessary to devide needs from wants and to prioritise on the critical areas.

At this point you can already see if your expected income and spending match, or if it will be difficult to maintain the needed cash-flow. Identify areas of high spending and work on ways to reduce cost. On the other hand you might also think of ways to increase income, preferably stable, reliable and regular income (like rent, salary, subscription fees, etc.).

May be your expected income is seasonal, but your spending is expected to happen on a daily or monthly basis. Plan your budget in such a way that you are able to bridge the times with no income and distribute your income over the entire period of no income. The risk of high seasonal income is the temptation of overspending at the time and running into cash-flow problems later on. In that case you might want to set up a monthly rather than an annual budget planner.

4. Once you have balanced your budget and decided on your income and spending goals, it is time to put your budget plan into action. Enter your income and expenses on a very regular basis to always have an accurate picture of the status quo. In case you have to overspend a particular budget line, decide out of which other budget line(s) the amount will come and reduce those accordingly, to avoid overspending. After practicing your budgeting for several month you might need to review your budgetlines and adjust the amounts to your real spending and income. Otherwisem try to stick to your budget as much as possible to ensure reaching your earning goal while spending primarily on the critical areas of your business.