It may seem that 2011 just began, but in reality we are closer to the end of 2011 than we are the beginning. This means that prudent business people are now thinking and planning for 2012. Prudent business people are not looking past the necessity to finish 2011 on a strong note. They understand that to have a good beginning in 2012, you have to finish strong in 2011. However; before 2011 is finished prudent business people begin planning for 2012, and this means putting together a budget for 2012.

Some importants things to consider when you begin the budget process:

Where do you start? I am a big proponent that you start with desired net income. Steven Covey in his book The Seven Habits of Highly Effective People says that "you begin with the end in mind." For every prudent business person, this means "How much profit" is the company going to make at the end of the budget year. You then begin working your way back up through G&A costs, Sells costs, COGS and to the top line Sales revenues. When you get to the top line sales revenues that are necessary to deliver on the budgeted net income, you must translate the revenues from dollars to units sold.

Why is a budget important? The process of developing the budget is as important as the end product. Many people do not like the budget process because when done correctly it is hard. It requires some real thought. It will many times "encourage vigorous debate" among the management team. It is better to have this "debate" during the budget process while preparing for 2012, than during 2012 when your management team is divided on the proper course of action for the company. A completed budget represents a guideline for meeting the stated common objective of how much net profit is to be earned in 2012.

How do you use a budget during the budget year? Once the new year begins, the approved budget becomes a roadmap that keeps management focused on the common objective and how the objective is achieved. The budget is a vehicle that helps provide funds for projects that advance the overall objectives of the company, but many times are funded only "when we have the available cash". A good budget will "set aside" cash for such worthy projects. The budget is also a vehicle that prevents excess funds being spent on projects are not producing desired results. If funds in a line items are spent before the end of the budget year, management gets an oppportunity to "re-assess" the effectiveness of money spent on the project before approving more money for the line item. In no instance is any budget "carved in stone". Good budgets are flexible; however, flexible in the sense that management gets an opportunity to ask the question, "is the flexibility required due to unforeseen events? Or, did we not adequately prepare for these events in the budget?". In instances of a good budget process the inadequate preparation for events are few and the budget should help provide adequate cash reserves or other "cushions" to help weather the storms brought on by unforeseen events.

At B2B CFO® we help owners/managers maximize profit and cash flow in their businesses. We help the business operate more efficiently. Implementing an effective budget process is a key factor in a business operating more effectively. If you have questions or want more information about how to improve the profit and cash flow in your business, contact Dave Davenport at ddavenport@b2bcfo.com.