Expenses can be categorized as fixed (insurance, rent, etc.) and variable (supplies, utilities, etc.). Everything that is paid out each month should be included, factoring in for taxes and other items that don't necessarily occur each and every month. Just organizing the data in this fashion may reveal immediate areas of action, like lagging receivables or expenses in a particular category that are out of scope. One of the first steps usually involved is that once everything is laid out in writing, it is time to review the list and decide where to adjust accordingly.
Variance Analysis
Once the groundwork has been laid and a tangible budget has been formulated, it is important to conduct variance analysis on a regular periodic basis to compare the actuals to the originally budgeted version of events. One could start with the big picture view, analyzing the variance to goals for the company as a whole. This analysis can be conducted on a category rather than a line item basis - for instance, expenditures can be viewed as supplies or salaries. It is a good idea to set a flag for any category, for instance, if year to date sales or expenses vary from budget by more than 10%, then the line item can be investigated further. For example, if supplies is running 15% over budget target, one can investigate the sub-categories for supplies in the chart of accounts, and find out that the expenditure was due to a need to replace a printer in the second quarter unexpectedly, or instead a particular area could be overspending on supplies in general, revealing an increase in the cost of goods sold. This could result in evaluating suppliers and making changes or negotiating better volume discounts. Without a budget plan that...
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