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Key Points

Understanding key points can be very beneficial when trying to analyze a situation. In this segment of Money Soup, you can begin to make sense of some common terminology.

Why Budgeting?

Budgets
Budgeting and then reporting budget comparisons to actual results is one of the strongest tools for effective management. A budget is a detailed financial forecast based on a plan for your business covering one or more fiscal years. If you never compare your forecast to actual operating results, it's as if you had built a swimming pool in your backyard and never learned how to swim! Forecasts and Budgets are tools to plan, check your results, make necessary changes in operations, and refine your forecasting process.

Are forecasts accurate in predicting your financial and operational future? Never completely. But in dealing with the pressures of trying for profitable results, an imprecise plan is better than no plan.

Budgets should consist of at least two parts: an operational budget to use in guiding operational activities (profit and loss expectations) and a cash activities budget to use in predicting and managing cash flow.

A familiar situation in fast growing businesses is that the sales volume of goods or services increases faster than the business can afford to increase its capacity. Late shipments or poor quality deliveries is the fastest way to slow down or even stop business growth.

Computer Accounting

The Electronic Slave

In the old days, the image of a bookkeeper or an accountant was that of a tired old man with a green eyeshade working behind a high top desk using a quill pen and wide ledger paper. Today, a bookkeeper sits in front of a computer screen or carries a laptop and the ink well has disappeared. Even with The Electronic Slave you need to know exactly what the program does and what procedures are required for accurate record keeping.

Economical computer accounting programs have removed much of the drudgery in maintaining an accounting system because all the arithmetic is done by the machine.

A computer accounting program can be used in almost all aspects of the record keeping process. This includes transaction entries, storage of detailed history, and preparation of financial reports.

Errors are still made, but they can be easily corrected when discovered.

The preparation of financial reports, formerly an arduous process, has now been reduced to a series of computer menu choices.

Spreadsheets Arenít Enough

Sometimes we hear clients say, I use a spreadsheet to keep my records. Our reply is that Spreadsheets Aren't Enough because double entry logic is not built into spreadsheet models.

Another weakness in this approach is that spreadsheets programs lack some of the basic error trapping routines built into any recommended accounting program, such as rejecting transactions where the income or expense classification is not contained in the chart of accounts.

Using a spreadsheet for a double entry accounting system is equivalent to re inventing the wheel. It may turn OK, but you won't win any races.

Spreadsheets accounting programs violate Double Entry Rule #1. They do not require that all transactions be in double entry format and that all entries must sum to zero.

The basic flexibility of a spreadsheet is that you work with data and formulas in the same arena. The basis weakness of a spreadsheet for accounting purposes is that the data and the error trapping rules are in the same arena, and you have to build the rules yourself on a custom basis.