“Planning is bringing the future into the present so that you can do something about it now“
– Peter Lakein
Important TIPS to remember when you assemble your business budget:
- Be RealisticWhen generating a financial budget, it is better to be more conservative. Underestimate your revenue and overestimate your expenses at first. Only once you can see the bottom line (net profits), only then, and only if necessary, should you go back to see where you can realistically reduce expenditure or where you are likely to achieve more sales.When budgeting expenses, always first consider history and the typical spending behaviour of the organisation. Look at the average expenditure over the past 12 months. Do not start with last year’s budgetIf you still employ the same number of staff and if you expect to achieve the same level of turnover, then it won’t be realistic to estimate that certain expense items to cost 25% lower than the previous year – unless you have identified and implemented specific cost reduction strategies. The same applies to turnover.
- Budget for cash!Cash flow problems have killed too many small to medium businesses. Such businesses often make the mistake of only tracking their profitability but not their cash flow. Example: A company may have a profitable month 1 on paper (sales less cost of sales less fixed expenses), however whilst they have already paid for the raw materials and the fixed expenses for the month, they will only be receiving the moneys 30 days later. The company may need to borrow monies in order to pay for more raw materials to supply in month 2 (since the monies from sales against such raw materials will only be received in month 3).Your budget must take into consideration the actual time when an item will be expensed or when turnover will be generated. From your budget you can then generate a cash flow forecast which will enable you to manage your funds properly or to secure any loans or bridging finance in time if required.Two examples of what not to do:- If turnover to a specific customer or market is seasonal (or slows down over certain periods (i.e. the holiday season)), then the monthly sales must be distributed in the actual amounts you expect each month to be. Don’t just divide the annual estimated sales by 12 equal and then allocate equal amounts to each month. See how sales were distributed the previous year.- Once-ff expenses (i.e. annual bonuses, levies or insurances) then the expense must only be accounted for in the actual month it will occur. Do not divide the expense by 12 months.Also consider the number of public holidays in each month, as they may have a serious impact on trade and therefore sales and expense items such as fuel, electricity, labour, etc.
- What get’s measured get’s done:It’s important to review progress against your budget regularly (at least monthly). This way you will not only acknowledge performance in certain areas, you may also be forced to control your expenses better from month to month. This will allow you to become more pro-active and will prevent you from receiving any negative surprises at year end.For new companies, these forecasts further will assist in the planning of operational requirements. In more established enterprises, it will play an plays an essential role in the short and long term strategy development as well as the measurement of performance against company objectives.
- Have some flexibility:For companies who are only starting their budgeting procedure, remember that it is always a work-in-progress tool. It should not be seen at ‘set in stone’. Expect it to change as your business changes and as you start tracking your expenses and measuring your performance more closely.Have a budget review periodically (i.e. every six months) until you have a good handle on it and until you are in a position to fairly hold yourself or your management accountable to it.Also don’t let your budget restrain you. Occasionally there may be valuable opportunities that will be very beneficial for your business. In such circumstances you will need to act outside your budget. It is normal to list ‘extraordinary items’ under reasons for being over/under ones budget.
- Don’t forget:Make sure to include all forms of income and especially costs. Examples of items you must not forget to leave out your budget or which may consider to include are:- Depreciation and other non-cash. You need to budget for depreciation against your fixed assets (current and expected purchases).- Interest and bank charges.- If you don’t have a ‘kitty’ for bad debts or for potential claims that may be a risk in your industry, then it would be wise to make provision for such items, by budgeting to expense it each month. Once you have build up a nice fund in the balance sheet, then you don’t need to make anymore provisions unless you draw from the fund.- Regulatory Levies & taxes. Even if you don’t pay certain enforceable levies (i.e. workman’s compensation, regional levies, etc), it may be wise to budget for such expenses (or make provision) should you be required to pay it at some time.Our Business Budget Model will guide you through all the necessary steps to generate a thorough and effective financial forecast.
More on budgeting and business budgeting software
Today’s business climate demands astute financial planning and a comprehensive understanding of the impact your various operational and strategic decisions are likely to have on the future profitability of your business.
As an entrepreneur, owner, business or financial manager or the person responsible for the assembly of a comprehensive and professional financial budget, it is likely that you already know what you want and you now need the right Business Budgeting and Forecasting Software suitable to your unique business environment.
We offer one product, a professionally designed Microsoft Excel Workbook file (.xls) with more practicality, ease-of-use and professional appeal that many of the less competitive budgeting tools currently available.
To download a sample of our budget model or for a list of features, please refer to our Home Page.
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