A budget is a financial plan for a year that requires regular checks and corrective action to ensure stated goals are achieved.
A budget is prepared for the following three main financial statements:
· Income & Expenditure Statement
· Cash Flow Statement
· Statement of Financial Position (or Balance Sheet)
Benefits of budgeting:
· Helps you focus on achieving goals
· Helps you stay on track
· Helps you anticipate and mitigate cash flow problems
· Helps you develop good practices.
The main Steps in Creating and Running a Budget
Set Financial Goals
Goals give you something to aim for. Setting them at the right level is crucial if the goals are too difficult, you will not treat them seriously; if the goals are too easy, you will not achieve your full potential. A good goal is both challenging and achievable.
Identify Key Drivers
Identifying the key activities that drive your income and costs will help you build a more accurate budget and decide on the right level of activity for the year ahead.
Prioritising activities will give clarity and direction. The timing of activities and the order in which they are done can have a significant impact on income, expenditure and cash flow.
Collect Accurate Data
Accurate data provides the building blocks of a budget. Your selling price per unit and anticipated sales quantities will come from your sales plan. For expenditure, you may be able to obtain unit costs from your previous accounting records; otherwise, trusted internet sites can often be a useful source of information.
Create a Budget Document
A budget model will allow you to calculate budget values for each category of income and expenditure, using for example, the following methodology:
Budget Value = Number of units x £ per unit
Challenging but achievable values for each budget category can help motivate you to achieve your overall financial goals.
By stating the assumptions in the budget, regarding key drivers, you can assess the impact on your financial results if any of those key drivers change.
Test Your Budget
It is useful to change the key drivers to assess their impact on your finances. For example, how would your profit and cash flow be affected if the unit cost of your largest budget item were to increase by 5%? Also, ask yourself: “Is my budget realistic, meaningful, ambitious and achievable?”
Work out what your breakeven sales figure is.
Formally Adopt Your Budget
It is often useful to share your budget with a trusted, objective business associate. They may be able to offer valuable feedback. Once you are content with the budget, sign it, accept it, believe in it and use it! Creating the budget is just the first part of the process.
Create a way of Staying in Control
A system of how and when to compare your actual results with the budget will help you stay in control of your business finances. A good system, regularly followed, will help you reap the benefits of the budgeting process.
Evaluate how well you are doing
By comparing your actual results with the budget, you will be able to spot any major variances or anomalies. Major variances and anomalies should be investigated quickly to determine whether corrective action is needed. Most accounting software these days produce actual v budget reports both for the current month and year to date.
Take corrective action, if needed
Any corrective action needs to be swift. To address an adverse variance, you will need to increase income and / or reduce costs to keep on track.
Continue to evaluate
The budgeting process is a means of evaluating the performance of your business. Make the most of budgeting to learn, refine and advance! This will improve your chances of success and help you find new ways of developing your business.
If you don’t have an accountant yet and need some advice, contact our expert* Sophie from 360 Chartered Accountants on 01924 950954 or at email@example.com.
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