Sticking to a Budget
Although it's not included among the standard financial statements, one of the most useful reports you can prepare for your own use is a budget. A budget gives you something to measure your actual results against, so you can see right away in a concrete manner how your business is doing in comparison to your original expectations. In the beginning, preparing a monthly budget analysis helps you keep on top of the numbers so you can make adjustments immediately when actual figures move far away from what you have budgeted. As your budgeting skills improve, you can do the analysis quarterly.
Budgets tend to measure mainly revenue and expense items, as those impact cash more immediately than do balance sheet items. However, balance sheet items that affect cash should show up on your budget analysis. Examples include owner draws, impending asset purchases, and paying down loan principal.
A budget analysis is a report in which you compare budget projections to actual results. When this analysis shows deviations between expected and actual, whether the number is over or under budget, determine the underlying cause of the variance. Once you know that, you can begin to make changes to get the numbers back on track. Even though individual items on your budget are important, it's also important to look at the total net effect before you take any drastic measures; a couple of off items may not throw your whole budget out of whack.
In general, you want revenues to meet or exceed budget, and costs and expenses to come in under budget. Unfortunately, the opposite is usually what happens: revenues come in below expectations, and costs and expenses run higher. All this really means is that you need to revise your budget, and your plans, accordingly.