Budgets – Old fashioned or Invaluable?
As someone who has spent many hours preparing budgets, the anonymous quote “a budget is just a method of worrying before you spend money, as well as afterward” is one I wish I had thought of! Whether you agree with this or not probably depends upon your disposable income. If there is a slim margin between your incomings and outgoings, knowing how much you have to spend for the week or month to come will make a huge difference to the amount you waste on discretionary items (i.e. the things you don’t really need)!
Here are some tips on business budgeting:
- Start with your outgoings. These are the easiest to predict, especially your fixed costs, so just pick these up from the previous year and adjust accordingly. If the recipient has a monopoly position (e.g. the Local Council), don’t forget to build in an increase.
- Then move onto your semi-variable costs. These are costs which vary with your activity level but are not directly related to turnover and contain both a fixed and variable element (e.g. power and telephone bills). You’ll have to estimate these by taking into account historic bills, likely price increases and likely activity levels (if you’re planning a big cold-calling campaign, from your office, your phone bill is likely to rise, same if you plan to recruit a new office staff).
- What you do next depends upon how easy it is for you to predict your sales. If you find this easy, enter your sales next and then using your gross profit margin, work out your variable costs. If you find it too difficult to predict your sales (currently quite likely) work back up the other way by calculating the sales you need to cover your outgoings by grossing these up by your gross profit margin. At least then this gives you a target to work towards. If the sales which fall out of this calculation are just not achievable at least you know you’re going to have a problem and can do something about it (e.g. cut your costs).
- Don’t forget your drawings and tax bills. Your outgoings should include your drawings and upcoming tax bills. Start off with a provisional figure for drawings and see whether your budgeted sales make these possible. If not, work out what you can survive on if times are tight.
- Use the budgeting facility in your accounting software. Any good accounting software should throw in some useful budgeting tools e.g. using the prior year as a starting point and giving you the option of increasing individual figures. In addition, when complete in draft you can export it to a spreadsheet to review it.
- One of the choices in budgeting that can cause confusion is whether to average out the overheads or just stick with the overheads as they are incurrred. The latter is simpler, but not as accurate on a month-by-month basis so it depends upon how complex your business is, but my view is that (unless your accountant can help you) you should keep things simple.
- The other advantage of your accounting software is that you can you use it for reporting and comparing actual against budgeted. The best layout is to compare the actual v. budgeted for both the month and the year to date. If you haven’t got any accounting software – shame on you – get some, as it’s now cheaper than a weekend away for two.
- In these rapidly changing times, whilst you don’t want to be changing your budget too often, there’s no point in sticking with budgets which have been overtaken by events so reviewing these quarterly is a good idea.
Get more budgeting hints and tips in this article:
Budgets – Why you Need One + Step by Step Procedures
Budgeting is reasonably straightforward once you get some practice, so if you need a hand to start on your budgeting contact me by email or call 0800 ASK NICK.
Dee – link here to budgeting article on the website please