Budgeting Success
A lot of small businesses are missing the importance of budgeting ahead.
The reason why businesses budget, is to set long term goals for themselves and to track the progress to ensure they are achieving what they set out at the beginning of the year.
Use it for anything, ie build up the business to make a decent living for the shareholders, improve the balance sheet position, take over a global market, the choices are yours. Plan for them.
Here are some simple ways of budgeting and forecasting the year ahead.
There are two ways, a long term fixed budget, set out at the beginning of the year and then track when the actual figures come through, or a rolling budget which means once the month is up you roll ahead to the next month, so you are always looking at least a year ahead.
Set yourself some goals you would like to achieve over the next couple of years, and set out how you are going to achieve them. This could be in note form or a more detailed report.
Sales
Set yourself realistic goals to achieve for your sales turnover. A top down approach. Use last year as a guide plus a percentage for growth or inflation.
This method is a great way of keeping the costs under control.
A bottom up approach, is more loose in that you put in your costs, and set the targets of sales that you have to achieve to pay for everything. It can make targeting sales more difficult as costs are not as controlled.
Cost of Sales
If you have been running your business a little while you might have these figures to hand as a percentage of turnover. If not then a costing exercise can be done to work this out.
Overheads.
Put everything in to this and spread it over the next year. Ie rent, wages, advertising, heating, office costs, travel. It all goes in here. Split it out by category so that you know what you’re spending on what.
If you are doing a yearly one, spread these costs over the 12 months.
If you are aware of seasonality fluctuations make sure they are apparent in your budget.
Starting off with the profit and loss budget is a good way to start, if you are feeling confident then set up a balance sheet forecast and a cashflow one too. If they are all connected together, you will always know ahead of time what your financial position is going to be. There is some great software in the market that can help you with this.
Now use this template to put in your long term goals. If you are looking to purchase equipment, or taking on new staff for a project, a new sales contract.
You may have to increase sales to achieve these goals, but set targets. You may have to increase your advertising spend, or take on more staff, take this into account.
Once your budget is done, then as the months pass and you know your actual income and costs. Put them into the spreadsheet.
If you are not quite making the targets, look into the cause of the fluctuations, to get yourself back on track.
Happy budgeting.
This blog is intended for information purposes only and is only advice from past experience, you may have other suggestions of your own. It is not intended to be used to make all of your business decisions but as a guide only.
How Graphs Can Be Used For Your Business
Graphs can be used by Financial and Non Financial managers in a variety of ways.
Sales
Sales Managers have targets that are set for them by the company they work for. They can track their sales in a variety of ways.
Our example shows Sales split by category/or segment and shown against budget. Targets that were set at the beginning of the year.
This graph also tells you the most popular and productive products on sale.
You can take this further and look at the margins of each product category, you might not sell a lot of something but if it returns a higher margin/profit rate, you don’t have to sell as many to get the same profit figures. There may also be seasonality in that product line.
Ie in hot weather a newsagent may sell a lot more drinks than bars of chocolate.
In cold weather the icecream freezer might go untouched. Easter, Half Term, Christmas. You would tailor your sales targets to match demand.
Apply this method to your particular product line.
Cashflow
You might want to set yourself a target bank balance for you to meet your overheads and make a profit.
The graph will show against budget whether you are meeting that goal.
It also gives indication of the business behaviour, see our example the graph shows above the line at first, then dips over February to April then comes back up. Back into the target position and above.
If the graph had shown erratic it would give an indication of how well the manager is managing the business. In a planned approach, or finger in the air approach.
Gross Profit
This is a key figure in your accounts, it indicates whether you have made enough sales to now cover your overheads and make a profit.
Our graph shows a rise and then a sharp dip in May, this could be down to several factors. The Sales themselves were generally low that month, an error in charging the right selling price for a new product line, an operational issue.
If you see a dip in any of these things, look for the reason, if easily explained, you could be putting action in to put yourself back on track. Also look out for high peaks, these should be explainable. ie a new contract, timing issues, seasonality, or it could be an error.
This blog is intended for information purposes only and is only advice from past experience, you may have other suggestions of your own. It is not intended to be used to make all of your business decisions but as a guide only.
