Budget Planning

• Provide a forecast of revenues and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out.
• Enable the actual financial operation of the business to be measured against the forecast.
• Establish the cost constraint for a project, program, or operation.
• Planning for business success

When you’re running a business, it’s easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.

Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

In fact, even without a formal process, many Business Startup Services carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cash flow and profit.

The Benefits of Budget Planning

The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

• A greater ability to make continuous improvements and anticipate problems
• Sound financial information on which to base decisions
• Improved clarity and focus
• A greater confidence in your decision-making

Business planning is most effective when it’s an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they’ve happened.

A budget is a plan to:

• Control your finances
• Ensure you can continue to fund your current commitments
• Enable you to make confident financial decisions and meet your objectives
• Ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future – defined by your plan that your business wants to achieve.

Creating a Budget

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic – if you overestimate, it will cause you problems in the future.
• What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?
• What are the fixed costs or overheads?

Your business may have different types of expenses, and you may need to divide up the budget by department. Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success.

Involve the right people – It’s best to ask staff with financial responsibilities to provide you with estimates of figures for your budget – for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

To boost your business’ performance you need to understand and monitor the key “drivers” of your business – a driver is something that has a major impact on your business. There are many factors affecting every business’ performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

BUDGET TYPES

Sales Budget – an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.

Production Budget – an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Created by product-oriented companies.

Cash flow/Cash Budget – a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing Budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Project Budget – a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget.

Revenue Budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

Expenditure Budget – includes spending data items.