Budgeting is an important process in most businesses. You can maximize the benefits of a sound budgeting process by conducting a budget analysis over a certain period of time.
Budget analysis can help you understand how to make money, where money is being spent, and how to maximize profits.
In this article, we’ll explain how to do a budget analysis and tell you the best tips for doing a good budget analysis.
Contents
1 What is Budget Analysis?
2 How to Do a Budget Analysis?
2.1 Choose Your Budgeting Strategy
2.1.1 1. Incremental Budgeting
2.1.1.1 Likely to Create Inefficiency in Business
2.1.1.2 Allows Information Bias in the Budgeting Process
2.1.1.3 This Method Also Tends To Ignore Changes For Improvement
2.1.2 2. Activity-Based Budgeting
2.1.3 3. Value Proposition Budgeting
2.1.4 4. Zero-Based Budgeting
2.2 Set Deadlines
2.3 Check Your Budget
2.4 Analyze Your Results
2.5 Prepare For Your Next Budget Cycle
3 Tips In Conducting Budget Analysis
3.1 1. Leveraging Technology
3.2 2. Collaborate With Your Team
3.3 3. Always Looking for Solutions
3.4 4. Stay Flexible
3.5 5. Find the Best Business Section
3.6 6. Always Thinking About the Future
4 Conclusion
What is Budget Analysis?
Budget analysis is a strategy for evaluating the financial health of a business.
By doing a budget evaluation, you can find out how much profit your business is making and compare how much money is spent in a given time period.
Performing a budget analysis can help business owners make important decisions about a company’s expenses and revenue streams.
Many businesses perform a budget analysis on a monthly basis, but you can also analyze your budget over a specific period of time, such as every three months, annually, or according to the closing time of your business book.
How to Do a Budget Analysis?
If you want to do a budget analysis for your company, here are some steps you can follow:
Choose Your Budgeting Strategy
Before you can analyze the budget in a business, you must first know the budget strategy implemented in the business.
Different businesses often use different budgeting strategies, such as comprehensive budgeting, incremental budgeting, or other budgeting strategies.
Look carefully at the various available budgeting methods, then choose the one that is most appropriate for the situation and characteristics of the business.
You may need to collaborate with colleagues and stakeholders to help decide which budgeting method to use.
4 budgeting methods you might consider in your business:
1. Incremental Budgeting
Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to get the current year’s budget. This method is the most common budgeting method because it is simple and easy to understand.
Incremental budgeting is very suitable for business if your business has main costs that do not change from year to year. However, there are some challenges in using this method:
1. Likely to Create Inefficiencies in Business
For example, suppose a manager learns that the company always increases its budget by 10% every year.
The manager will simply use the opportunity to get a bigger budget, without trying to find ways to cut costs or save expenses.
2. Allows Information Bias in the Budgeting Process
For example, a manager will reduce the value of the budget in a division, thus making the team always under budget.
3. This Method Also Tends To Ignore Changes For Improvement
For example, there is very high inflation in certain production costs.
This method is less adaptable to sudden changes in operations and only uses a predetermined budget value.
2. Activity-Based Budgeting
Activity-based budgeting or activity-based budgeting is a top-down budgeting approach that determines the amount of input needed to achieve production or output targets set by the company.
For example, a company sets a target of 100 million in revenue. Companies need to first determine the activities that need to be carried out to meet sales targets, and then find out what costs are needed in planning these activities.
3. Value Proposition Budgeting
In value proposition budgeting, the budget maker should consider the following:
1. Why are existing amounts included in the budget?
2. Does the activity create value for customers, staff, or other stakeholders?
3. Is the value of the goods sold greater than the costs to be incurred? If not, is there another reason why these costs should be in the budget?
Value proposition budgeting is really a mindset about ensuring that everything included in the budget delivers value to the business. Value proposition budgeting aims to avoid unnecessary expenses.
4. Zero-Based Budgeting
As one of the most commonly used budgeting methods is zero-based budgeting, starting with the assumption that all departmental budgets are zero and must be rebuilt from scratch during budget planning.
Managers must be able to check every expense that occurs. No expense is automatically “approved” without clear details.
Zero-based budgeting is very strict. This process aims to avoid any expenses that are not considered essential to the success of the company’s operations.
Zero-based budgeting is best used when the business has an urgent need to save costs. For example, in a situation where the company is going through a financial restructuring or a major economic or market downturn that requires it to reduce its budget massively.
However, this budgeting method can be a very time-consuming approach, so many companies only use this approach occasionally at any given time
1. Set Deadlines
Once you’ve decided on the budgeting method to use, think about the deadlines you’d like to use for your budget analysis.
Generally, the budget analysis cycle occurs every month, but you can choose other periods such as every quarter or fiscal year.
You may also want to do a budget analysis across multiple time periods, such as monthly and quarterly.
When you decide on deadlines in the process, also make sure you consider how long it will take you to get financial information in the business.
This financial report is very important in the process of budget analysis and knowing how much profit you get in a certain period of time.
2. Check Your Budget
When you have determined your budgeting strategy and deadlines, you can start checking the information in your budget.
Many businesses choose to use accounting software or other technologies to simplify this process.
Be sure to track expenses and income across the business. Many budgeting methods require a breakdown of income and expenses, so try to pay attention to the details needed in determining a good and correct budget strategy.
3. Analyze Your Results
Based on the deadline you have chosen, evaluate all of your budget information.
Find out what makes your expenses or income bigger, and why this might be.
If you find you’re spending more than you’re earning, think about ways to limit your spending or increase your income.
You can also use your budget analysis report as a basis for requesting additional funding through a loan or seeking external investors.
4. Prepare For Your Next Budget Cycle
Finally, you can use information from one budget cycle to prepare for the next.
This means that the total final score on your previous budget becomes the starting value for the next budgeting cycle. Remember to make the necessary changes based on your budget analysis.
Tips for Conducting Budget Analysis
Here are some additional tips to support your budget analysis:
1. Leveraging Technology
Accounting software with budgeting features like Accurate Online can help you track your income and expenses.
Accurate Online can also help you understand budget information easily and quickly.
For example, using Accurate Online you can get certain types of reports that you need to evaluate expenses in certain categories or departments.
This is because Accurate Online has budgeting features, multi-departmental, multi-branch, and various features that will simplify the bookkeeping and budgeting process for your business.
2. Collaborate With Your Team
Financial information can be complex, especially in a business with many departments or divisions.
It will be most helpful to you if you collaborate with colleagues in your own department and/or your team to decide what type of budget to prepare, gather budget information, and interpret the information you gather from the budgeting process.
3. Always Looking For Solutions
The most important part of the budget analysis is to ensure that you use the analysis reports effectively.
When you come across a challenge or problem in the budgeting process, remember to look for some solutions.
Brainstorming with a team is the best way you can come up with budgeting strategies and problem-solving.
These activities can also help you make financial information more useful and make the next budget cycle easier
4. Stay Flexible
Remember that your budget must meet the needs of your business.
If your budget strategy and analytical methods can’t deliver more benefits, consider other ways that your process can change for the better and suit your needs.
You can also schedule an evaluation of the budget analysis process at specific times to ensure your system remains productive.
5. Look for the Best Business Section
Sometimes, it’s easier for us to focus on the bad than the good, even in the business budgeting process.
Many business owners focus on areas of the budget where expenses exceed revenues, but they can check that sections or departments that are successful use their budgets well.
Look for departments or divisions that are successful at maximizing profits in the budget cycle and try to find out how they achieved that success. Then, try to apply this method to the part of the business that needs improvement.
6. Always Think About The Future
Budget analysis can be a useful way to find out how financially healthy a business is at any given time.
They can also be a valuable way to make predictions about the financial future of your business.
When you analyze your budget, see if you see good trends and determine if you can forecast future budget information based on that data.
Conclusion
That’s a complete discussion of budget analysis in a business and some tips that you can adapt to your business.
Also, make sure you choose the right budgeting strategy method for a better budgeting process.
Performing a budget analysis is the first step, your next step is to find a way to store all this financial information so that you can make the best decisions for your business.