What is a budget? It is a plan to:
1. control your finances
2. enable you to make confident financial decisions and meet your objectives
3. ensure you have enough money for your future projects
A budget outlines what you will spend your money on and how that spending will be financed. At the same time, it is not a forecast. A financial forecast is a prediction of the future, whereas a budget is a planned outcome of the future that your business wants to achieve.
It’s worth setting aside some time to fully consider all the elements of your budget. If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately be a more effective tool.
Use last year’s figures – but only as a guide; collect historical information on sales and costs if they are available. But it’s essential to also consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment.
Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period. This is usually a financial year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing budget or your sales budgets.
Your overall operating budget should include:
• Projected sales and revenue
• Total costs of the projected sales and revenue
• The profit or loss as reflected in the above numbers
• A column for your actual numbers- fill this in on a regular basis (at least once a month) to ensure you are on track.
To use your budgets effectively, you will need to frequently review and revise them. This is particularly true if your business is growing and you are planning to move into new areas. Using up-to-date budgets enables you to be flexible and lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.