How to create a budget

Dave JonesBusiness Matters, Finance for Non-Financial Managers0 Comments

What is a budget and why do you need one?

A budget is a vital tool for business success. It can help you meet strategic objectives, make good financial decisions, expand the business, benchmark performance, determine operation costs, fund present and future operations, understand the revenues needed to support the business, obtain a realistic estimate of likely profits, control cash flow, allocate resources appropriately, get a clear idea of start-up costs for new business, and so on. If you don’t have a budget and don’t budget correctly then you could end up spending more than your income or spending too little and so hindering the growth of your business.

Top tips to creating a budget

  • Set aside quality time so that you can put in the required effort.
  • Consult and involve people with financial responsibilities or expertise who can help you draw a complete financial picture and review your budget.
  • Create a mind-set where you’re all realistic, flexible and proactive.
  • Consider whether one overarching budget or several separate budgets are needed for different departments or scenarios.
  • Develop a budget action plan so that you know what you are doing and when.
  • Establish a system that ensures you get the right information for your budget so that you can monitor the key drivers of business such as sales and costs.
  • Research and purchase any financial software that you need.
  • If you’re already in business, use last year’s figures on sales, profits and related costs as a guide.
  • If you’re just starting out, get an idea about figures from others in the same business or of the same size or do market research for example by contacting suppliers for quotes.
  • Consider your sales plans and sales resources bearing in mind economic conditions and your competition.
  • Prepare sales or revenue forecasts based on things like past sales history but remember to err on the side of caution and to bear in mind market conditions.
  • Factor in any one-off capital costs and establish your fixed costs, these include rates, rent and salaries and generally stay the same irrespective of how much or how little you sell.
  • Variable costs rise and fall in line with your sales – they might include costs for extra staff or raw materials – find the link between the two and use your sales forecast to project variable costs.
  • Identify the break-even point –the level of sales where you neither make money nor lose money – it helps identify the volume you must sell to avoid losing money.
  • Work out non-operational cash flow like taxes and financing.
  • Using historical or research information work out income and expenditure patterns.
  • Prepare your one overarching budget or all your budgets.
  • Discuss, adjust, agree and update regularly the budget with all responsible parties and accept that economic and competitive and business conditions will mean that changes will occur and will have to be incorporated.

If training is required on any of the topics discussed in this article, please have a look at our customisable Finance for Non-Financial Managers elearning courses.

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