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If you refuse to make your company budget flexible, it'll lead to financial difficulty

by , 04 September 2014
Your company's finances are of vital importance. You need to keep them in check and ensure you don't overspend.

That's why you create a budget to help you do this.

But all too often, business owners become too precious about their budgets. They cling to them like life rafts.

This can result in major financial issues if your circumstances change but your budget doesn't.

That's right. If your budget isn't flexible, you're heading for serious trouble. Here's why...

 

Here's why an inflexible budget could cause serious financial issues in your company

  
If the activities your company actually does differ from your plan, don't use your original budget. If either sales or production volumes differ from your plan, using that budget will cause bigger problems. 
 
This is because you may have created a budget that doesn't provide for your current real-life expenses or income. 
 
This could lead to under-budgeting. And you'll have a serious problem when your suppliers say you still owe them money or you don't make as much income as you expected to cover your costs. 
 
You need to ensure your budget can accommodate any changes in your company's activities. That's why you must change your budget anytime your activities don't match your plan.
 
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Do this anytime your activities don't match your budget to make it flexible

 
Answer these questions:
 
• How much of the difference in my sales numbers is because of higher or lower sales volumes and how much is because of higher or lower prices?
 
• How much of the difference in cost number is because of higher or lower activity, and how much is because of good or bad cost control?
 
To answer these questions, prepare a budget as if you achieved your original goals. Then analyse the differences. This is easy if you prepared your budgets carefully and set up the differences and connections in your spread sheet. 
 
By simply doing this you can ensure your budget remains flexible and can accommodate any changes in your company's activities. 


PS. Here is an amazingly simple way to manage your financials, with the Master Budget Series
 

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