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Budgeting: Profit and Cash Flow
A business can't open its doors each day without
having some idea of what to expect. And it can't close its
doors at the end of the day not knowing what happened. A business
should follow that same motto as “Be Prepared”. It should plan
and be prepared for its future, and it should control its actual
performance to reach its financial goals.
Business managers have two broad options: They
can wait for results to be reported to them on a "look back" basis;
or they can look ahead and plan what profit and cash flow should
be, and then compare actual results against the plan. The latter
option is the essence of budgeting in a business context.
Please be careful with how you use the term budgeting. Budgeting
does not refer to putting a financial straitjacket on a business.
Instead, business budgeting refers to setting specific goals
and developing the detailed plans necessary to achieve those
goals. Business budgeting is built on realistic forecasts
for the coming period, and it demands that managers have a thorough
understanding of the profit blueprint of the business and the
financial effects of the business's profit-making activities.
A business budget is an integrated plan of action - not simply
a few trend lines on a financial chart.
The financial
statements included in the annual financial
report of a business are prepared after the fact, that is,
the statements are based on actual transactions that have already
taken place. Budgeted financial statements, on the other hand,
are prepared before the fact and are based on future transactions
expected to take place based on the business's profit strategy
and financial goals. Budgeted financial statements are not
reported outside the business; they are strictly for internal
management use.
Budgeting is much more than slap-dashing together a few figures.
A budget is an integrated financial plan put down on paper
or, more likely these days, entered in computer spreadsheets.
The key characteristic of budgeting is planning. Planning requires
a lot of time and effort on the part of managers, who must
do detailed analysis to determine how to improve the financial
performance of the business.
To construct budgeted financial statements, you need good
models of the profit, cash flow, and financial condition
of your business. Models are blueprints, or schematics of
how things work. A business budget is, at its core, a financial
blueprint of the business.
Budgeting relies on financial
models, blueprints that serve
as the foundation for preparing budgeted financial statements.
These statements are:
Budgeted income statement (or profit report):
Much of the information in an internal profit report is confidential
and
should not be divulged outside the business. The P&L report
is like a schematic that shows the path to operating profit.
It reveals the factors that must be improved in order to improve
profit performance in the coming period.
Budgeted
balance sheet: The key connections and ratios between
sales revenue and expenses and their corresponding assets and
liabilities are the elements of the basic model for the budgeted
balance sheet.
Budgeted
statement of cash flows: The changes in assets and
liabilities from their balances at the end of the year just
concluded to the projected balances at the end of the coming
year determine cash flow from profit (operating activities)
for the coming year. These changes constitute a model of cash
flow from profit. # # # # # SolveYourProblem.com : 2007
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