When we hear the word ‘Budget’, it’s not uncommon to relate it to the annual government budget review. But let us think about the country as a business that needs a budget. Why shouldn’t our businesses need a budget too?
Budgets don’t have to be scary. If we start by thinking of them as an ‘educated guess’ it takes some of the potential fear away.
In this article I hope to share some ideas on budget creation and an ongoing review of it throughout the year.
Where to start your budget
Creating a budget starts with either one or both of these things; known income / expenditure patterns or a business plan. Neither of these things are definitive, but they can help you to create a budget for the upcoming 12 months. This can be used each month to monitor your business progress.
With some previous trading information a budget can be created using your expected business variances year on year. I find using a spreadsheet the simplest way to create this type of budget.
So, if you are expecting revenue to increase by a number of % points then this can be calculated using a simple formula in your spreadsheet. Following the same format, your cost of sales and overheads can be calculated based on the previous year’s actual results alongside an expected variance for the next year.
A few formulas in a spreadsheet can then give you your budgeted income, expenses, gross profit, net profit and from these a number of projected KPIs for the business to work towards.
For a start-up business there won’t be the data from the previous year available. A first trading year budget is likely to be less accurate, but still a valuable tool.
This type of budget will be less fleshed out; I’d suggest very simple revenue projections from your business plan, taking into account any expected fluctuations during the year. Your expected gross profit will then provide your cost of sales for each month.
Overheads can then be added either as single line calculated from your expected net profit, or as known overheads by nominal account if this information is available to you.
However detailed your budget is, the most important element of having a budget is reviewing it monthly against your actual results. This should become part of your monthly reporting habit.
Reviewing your actuals vs budget monthly allows you to reconsider whether your budget is realistic or if you need to make changes to business expenses to meet the budget. There is no harm in altering a budget throughout the year based on trading patterns. It is better to have a more accurate idea on how your business will end the financial period.
If creating, reviewing or reporting on a budget sounds like something you’d like some help with, why not give me a call – this stuff is what I get up for each day! Outsourcing something that you don’t have passion for allows you to focus on the things you do.
Give me a call, drop me an email or leave me a message.