The finance department of a business handles the flow of money and capital the company has. It may sound simple, but the process to allocate funds is a very tedious, trust-oriented, and delicate job that can make or break a company. Whether you have an entire department or if you rely on your own decisions when it comes to allocating funds in your business, here are the steps to follow:
- Measure. Determine your current cash flow by using regular income statements and other financial statements such as the balance sheet. Understanding your current financial situation will help you identify the financial health of your company, which will strongly dictate how you will allocate funds. Limited cash inflow means that you need to slash the budgets for the various departments and expenses which your business incurs. Massive cash flow, on the other hand, means that you can invest in new acquisitions, such as computers and production equipment.
- Identify. Check out the key operations in your company. Depending on the size of a company, the major operations and departments include human resources, production, advertising, and product testing. List these in a sheet of paper and determine the activities and budgets that these departments need in order to operate. Remember to include the employee pay in each department with the budget allocation plan. Employee budget can be tricky to work out, especially if you are managing a large corporation with a large staff. Not all employees are paid with the same rates, which can make budget allocation even more difficult.
- Prioritize. Looking at the identified list and rank the departments or business processes according to priority. Ranking should be determined by your company’s strengths and weaknesses. If you already have a good stock of products for selling, you can cut back on the production budget and focus on advertising and marketing instead. If you need more employees, you can channel more funds into the human resources department. Remember that no company has everything it needs when it comes to income. Because of this, you will not always be able to satisfy all of your department’s needs. Through careful prioritization, however, you can keep the company running smoothly.
- Math. Add up the total cost of your needed activities. Compare the sum with your income statements and see if the budget allocation scheme that you have created can work with the present financial status of your company. Be sure, however, to leave aside 10-20 percent of your budget for emergencies. Sudden production equipment that breaks down needs to be replaced immediately, for instance. Burglary, natural disasters, and other unforeseen events should be taken into account. This is done through the emergency budget allocation.
Through these steps, you can create a budget allocation plan that will fit all of the needs of your company. Remember to take time and careful consideration when allocating your budget, since the budget and how you allocate funds will play a major role in the growth or stagnation of your business.