How To Prepare Your Budget
The budget is important because it provides a framework that allows you to measure the financial performance of the business. This will make it easier to make decisions about the management and direction of the business. Even though this may be an obvious point, a lot of small business owners do not prepare a budget or, if they do, often fail to monitor the actual performance against the budget on a regular basis. As a result, incorrect or poor decisions may be made that can impact on the viability of the business.
It is also important to understand the difference between a budget and cash flow. In brief, a budget will record the expenditure when you receive the account and record the income when the invoice is sent out whereas a cash flow will record the payment when it comes out of your bank account or when the income is deposited into your bank account.
When preparing a budget there are some key steps to follow and some of these have been summarised below.
- Review the strategic or business plan for the previous 12 months and use this to identify key objectives for the next 12 months.
- For each of these key objectives evaluate the financial implications and then link to a timeframe when they are planned to occur during the year.
- Review the previous budget and actual performance for the 12 months and identify the variations and why they occurred.
- For the next 12 months identify any seasonal factors or trends and what financial impact that they may have. For example, if you have stock you may need to purchase larger quantities one or two months prior to the sales occurring. If you provide a service you may need to employ additional staff during peak times. As such, reflect these additional costs and revenues in the budget.
- If you plan to make any large capital purchases, for example, office equipment, motor vehicles or maybe a new building then detail how they will be paid for. For example, if by loan or lease then include the monthly payments in the budget.
These are just some of the key steps to follow and consider when preparing the budget as there may be others depending on the type of business you operate. For each one it is critical to identify the implications and what impact it will have on the business. Then allocate the expenditure or revenue and when they are likely to occur throughout the year. A key part of this step is to be clear about how each figure has been calculated and what assumptions you may have used. The reason why this is important is that when you measure the actual performance against the budget it will assist you to analyse and identify why the variations have occurred.
A budget is important to have and will help you to monitor the financial performance of the business in conjunction with the strategic objectives. As noted at the start, there is no point having a budget if you don’t monitor it. The budget should be reviewed each month so you can monitor performance and actively manage the business to achieve the strategic objectives.