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Flexibility: The key to keeping your company's finances healthy

by , 28 May 2014
At the end of last year, we're willing to bet you spent lots of time planning your budget. We're also sure you're confident in what you've projected for your company.

Now, five months later, you check it and realise your actual sales figures are much lower than your projected ones.

What should you do? Put the budget back in the drawer and carry on with business like nothing's wrong?

NO! That's one of the biggest budgeting mistakes you can make.

What you need to do is make your budget flexible. Here's how to do it...

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Three accounting record risk areas to watch out for
 
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Ask these questions if your company budget doesn't match your real figures

Treating your budget as if it's set in stone is a huge budgeting mistake. That's why you need to ask yourself these questions as soon as you see a problem in your company budget:
 
1. How much of the difference in sales is because of higher or lower sales amounts and how much is because of higher or lower prices?
 
2. How much of the cost difference is because of higher or lower activity, and how much is because of good or bad cost control?
 
The reason you must ask yourself these questions is you need to know where the difference came from so you can adjust your budget plans properly.
 
You must prepare a budget to answer these questions. It'll help you see if you achieved the actual level of activity you planned and then analyse the difference. This is really hard to do if you don't create a flexible budget.
 
But what else must you remember when you create a flexible budget?
 
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What do SARS and CIPC say about accounting reports?
 
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Remember these two points when you create a flexible company budget

 
The Practical Accountancy Loose Leaf says when you do your budget preparation you must bear these two things in mind:
 
1. The total difference in costs change as activity changes; and
2. The total fixed costs remain unchanged.
 
So ensure you create a flexible budget with those two points in mind and you'll be able to deal with any changes in your expenses and income.
 


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