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

How to Create a Budget For Your Business

How do I perform a budget analysis?

Looking critically at your budget will allow you to nip problems in the bud before they occur. To analyse your budget, consider the following:

Your cash budget is intended to predict your future cash position month-on-month.

If you think you might go into the red at any point, look at the remedial action you could take. You could increase prices or cut back on sales to avoid the nightmare scenario of bankruptcy. If your cashflow is particularly variable, look closely at fluctuations within the month to see if you can pinpoint a problem.

Your profit and loss budgets are intended to analyse projected margins.

If margins are not what you expected, look at whether you can raise prices, cut down on costs or focus your efforts on the most lucrative sector of the market. Small, growing businesses will be looking at how to break-even as quickly as possible.

Your balance sheet can allow you to assess turnover.

If working capital is outstripping sales, work out why this is and try to address it. Additionally, work out how refinancing payments will affect your position.

Compare predicted figures with historical performance to see what is going well.

Also consider comparing performance with other companies, or between departments in your own.

How can I carry out a sensitivity analysis?

You can use forecasting software such as ForecastPro or Sage to have a look at the potential changes that alterations to your budget assumptions could bring. Forecasting software will allow you to quickly see the effects on your cashflow, profits and balance sheet in real time.

In particular, use sensitivity analysis to analyse the different levels of sales (have a look at best-case, worst-case and the most likely scenarios as a minimum), changes to costs and other risks, such as market failure or over-reliance on a particular customer.

How do I analyse my company’s actual income?

As part of good budgeting, you should compare your actual income with your sales budget each month as various reasons can set it off course.

For instance turnover could come out lower than expected because of decreased sales volume or prices, or an underperforming market, product or location. Or turnover could be higher than expected and this could be a result of sales targets being set too low, a one-off spike in sales (or the beginning of a long-term trend) or sales brought forward from future periods.

Timing of income can also differ from what was predicted, and this too will set your budget off. This might be affected by a faster or slower than usual income from a sales campaign, or late payment from customers.

How do I analyse my actual expenditure?

Again, you should monitor your outgoings and amend future budgets to reflect unexpected differences. Situations could include fixed costs differing from what was expected. This shouldn’t occur often, but sometimes fixed costs can change as the business grows or contracts.

Additionally, variable costs can differ from what was expected as sales volumes than be different from what was expected or because of ‘price variance’ (a change in the difference between costs and turnover), and timing of expenditures could differ from what was predicted.

By creating an annual and monthly budget, and by measuring them against each other, you’ll be able to identify regular highs and lows in the market, where money can be saved and invested for growth. It will help you to prepare for the future and manage your cashflow more effectively.

For more information on financial planning for your small business, check out our sister site Startups.co.uk’s dedicated section here.

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