How to Create a Budget For Your Business
From predicting sales to analysing income, we look at how to create and implement a financial forecast that works for your small business
Uncertainty is the bane of any business; not knowing what the future holds can lead to poor decisions. Budgeting is a key tool for helping control uncertainty in a business – it can help you learn from your mistakes, assess the true health of your business and allow you to make informed decisions about its future.
This article will help you with all aspects of budgeting, including how to predict the sales figures you need, how to prepare cashflow, profit and loss, and balance sheet documents, and how you can use your budgets to maximum effect.
How does budgeting work in a real business?
Following some simple rules of thumb from the outset will ensure your budgets have the best chance of working.
Get the right people involved
Make sure to share information between employees responsible for different aspects of the business, such as marketing or purchasing. In addition, only give control over the budget to those with the power to change it.
Be realistic in your financial forecast
Use last year’s figures as a guide and allow at least two or three months to prepare for your yearly budget. Update your budget month-on-month with the latest figures and link it to your cashflow forecast. To get the data you need, send out spreadsheets to the people responsible for reporting budget information.
Use budgets effectively
Use them to help manage your cashflow and set what needs to be done across the next budgeting period. Allow the board to review consolidated budgets on a monthly basis, and set up a reporting system to manage unexpected variations in your budget.
Use budgets to spot problems on the horizon.
Produce reports as soon as the period ends, with no delay, and take action immediately after the board produces its review of the budget reports. Combine budget forecast figures with key performance indicators for an ongoing indicator of how your business is doing.
How do I forecast my business costs?
When calculating your costs, look at your company’s various outgoings and their relationship with your sales.
Remember to take into account that fixed costs don’t generally relate to sales in a direct way; however, variable costs are tied to turnover or sales in some way. An example is production costs; these might be a percentage of the total turnover or a cost per sale, or both.
Semi-variable costs are a combination of the two. For example, your expenses budget might be a combination of meals for employees (fixed) and client entertainment (variable).
Also try to forecast costs in the future by looking at both fixed and variable costs. Get in touch with your suppliers and ask for quotes, analyse how costs have changed in the past and make sure to account for likely fluctuations in the market.
Finally, tie down uncertainty in costs by removing all the necessary insurance, and use long-term contracts where possible.
How do I forecast my company’s sales?
You generally calculate sales forecasts by looking at your sales history and how you expect to grow these sales going forward.
Start by looking at your sales history and use this as the bedrock of your sales forecast. Sales histories can tell you how you are marketing, branding and pricing your offering. Bear in mind potential changes in your sector, including how the competition is getting on and any other business changes you have undergone, like changing which end of the market you target.
After you have your sales data organised, analyse your resources and how you plan to use them. In particular, look at what direct selling methods you plan to use and how many customers will be contacted, as well as how many will potentially say yes. Also try to forecast if you’re going to carry out advertising or other promotional campaigns and how many leads you will get, and, more importantly, how many of those will lead to sales. Decide approximately how much of your business’ time will be allocated to repeat business and how you reasonably expect this to perform.
Another key part of creating a budget is to compare your plans and historical performance, and assessing how the two differ. Ask yourself why that is the case in every instance of discrepancy. And remember the seasonal issues affecting your business, this is especially useful in deciding when to embark on a big promotional drive and if there are any special events that will affect your business this year.
Finally, consider creating a complete picture by forecasting for different products or regions. If there are problems, separate forecasts are invaluable in narrowing down where the issue lies.
How do I prepare my business budget?
Once you have your sales and expenditure forecasted, use them to prepare your budget along with the timing of payments, making sure to account for late payments, how much needs to be written off as bad debt, your credit terms and payment types.
Also put together a month-on-month cash budget by comparing the timing of likely income and expenses and prepare a profit and loss budget. This will show your predicted profits over the next period
Make sure your budget includes non-operating cashflow in your cashflow forecast, this should include loan repayments and other financing requirements, tax and VAT and stockholder dividends. Finally put together a balance sheet budget. This will show your total balance sheet at the end of the period, including items such as new equipment, capital disposals and asset depreciation.