Small businesses that operate on a budget basis go through four distinct phases: preparation, approval, execution and evaluation. The budget cycle is a process that helps businesses plan and manage their finances.
Preparationis the first phase of the budget cycle. This is when the business owner or manager creates a budget plan for the upcoming year.
This plan should include estimated income and expenses, as well as any goals or objectives the business wants to achieve. It's important to be realistic when creating a budget plan, as it will be used to guide the business's financial decisions throughout the year.
Approvalis the second phase of the budget cycle. Once the budget plan has been created, it must be approved by the business owner or manager. This is an important step, as it ensures that everyone involved in the budgeting process is on the same page.
It also allows for any changes or adjustments to be made before the budget is put into action.
Executionis the third phase of the budget cycle. This is when the budget plan is put into action and all financial decisions are made according to it. During this phase, it's important to monitor and adjust the budget as needed in order to stay on track. This may involve cutting costs or increasing income in order to meet goals.
Evaluationis the fourth and final phase of the budget cycle.
This is when the business owner or manager evaluates how well the budget plan was followed throughout the year. This evaluation should include an analysis of income and expenses, as well as any goals or objectives that were set at the beginning of the year. Based on this evaluation, changes can be made to improve future budget plans. The four phases of a budget cycle for small businesses are essential for successful financial management. By following these steps, businesses can ensure that their finances are managed effectively and efficiently.