Why Create a Budget?

Creating, monitoring and managing a budget is key to business success.  For many, the budgeting process is a natural part of the management process and yet so many companies fail to put together and manage to a budget.  A budget helps you allocate resources where they are needed, so that your business remains profitable and successful.  It need not be complicated.  You simply need to work out what you are likely to earn and spend in the budget period.  A budget centers your decision-making on hiring, setting sales goals for your salespeople, determining the timing for possible product or location expansion and managing to your growth targets. 

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic – if you overestimate, it will cause you problems in the future.  If you are in a supply constrained market, be realistic about sourcing your capabilities.
• What are the direct costs of sales – ie costs of materials, components, employees or subcontractors to make the product or supply the service?
• What are the fixed costs or overhead such as rent, electric and other ongoing expenses.

If you already have some operating history, it is quite easy to look at past expenses to determine where you are and where you want to be going forward.  Your business may have different types of expenses, and you may need to divide up the budget by department.  Don’t forget to add in how much you need to pay yourself, and include an allowance for tax.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overhead, so it would be worthwhile preparing this first.

Once you’ve got figures for income and expenditure, you can work out how much money you’re making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cashflow problems, giving yourself time to do something about them.  Budgets first begin at the level of profit and loss but should also be extended to include a cash-flow budget.  Timing in payroll and collections change your cash-flow from a straight profit and loss, that is, when you recognize sales and expenses vs. payment and collections.

When you’ve made a budget, you should stick to it as much as possible, but review and revise it as needed.  Successful businesses often have a rolling budget, so that they are continually budgeting, eg for a year in advance.  Yet other companies review and update their budget semi-annually or quarterly.  If your business has wide fluctuations in sales, your budgeted expenditures will require greater monitoring and revision. 

If your company is project-based, hitting target completion dates of projects, and therefore collecting money from clients, will be critical to sticking to your budget.  A slip in delivery dates, and therefore in collections, may delay hiring and your budget may then need to be updated. 

This is a basic and crucial part of your ongoing management responsibilities.  Enjoy the process and as you begin to exceed your sales budget, you can challenge your team for uber-growth!  Happy budgeting…