Answer to Question #78666 in Finance for Liam Johnston

Question

Identify and describe four types and sources of data and information required for budgeting and forecasting. Explain how data is applied to budgeting and forecasting processes.

Answer 1

For many new businesses, a budget is part of the financial plan created during the initial planning stage for the business and is included in the business plan.
But what if you’re considering a spinoff of your current business, exploring the idea of launching a new venture, or are in the process of revamping your finances? In any of these cases, you may not be ready or have a need for a complete business plan but a budget is in order.
A business budget is much like any kind of budget you would use for your personal finances. In business, it can be an effective tool to help you determine whether or not your business idea is viable. It also gives you an opportunity to evaluate your current financial situation and tailor your plan in a way that will help you reach the financial goals of your business. Plus, maintaining a budget for your business on a regular basis can help you track expenses, analyze your income, and anticipate future financial needs.

Step 1: Identify Your Goals
The first step of creating a budget is identifying your goals for your business. Much like the information you would include in a business plan, you will need to think through what you want to accomplish with your business, i.e. how much you want to make.

Step 2: Review What You Have
Take time to review documents from your business as it is today, including your income statement, your balance sheet, outstanding debts, past tax returns, assets, liabilities and a projection of immediate cash flow. And don’t forget to pull out any current budgets you use for your business, as they can serve as a starting point for your new budget.
Step 3: Define the Costs
What are the specific costs associated with each of your goals identified in Step 1? This is where you would break down each goal into an annual tangible amount of money, and then break it down by month. Use past data from your business to fill in all of the costs, and do some research to generate approximations for each item you do not know the cost for.

Step 4: Create the Budget
Taking the information you have from Step 2 and Step 3, develop a spreadsheet. One way to do this is by working backwards from the bottom line and seeing where you end up. Keep in mind that you may need to make some adjustments as you develop your budget.
Your budget should be a tool you use daily in your business, not a document you create and then forget. By using a working budget, you will become more accurate over time and be able to make good decisions about your business and any new ventures you’re considering.