Five things to follow when creating a business budget
Posted on 11th September 2020 at 11:16
It is nearing the end of quarter three and now is a good time to consider setting your 2021 budget requirements if you have not already done so. This will be especially challenging due to the current Coronavirus situation with many businesses needing to adapt their budgets accordingly.
Your financial requirements and priorities have no doubt altered. You may need to focus on finding the right loans and grants to enable you to carry on trading, your accountants will be able to help you in applying for these. There is a lot of additional help and support available currently for businesses. It is important to make sure that you are aware of all the options and make the best use of them as they are there to help your business.
If your accounting year has already started it will be sensible to revise your budgets for 2021 and your accountants will be able to advise you on this.
Here are five things that you will need to do as part of your budget.
1. Understand your income and where it comes from
Work out how much you charge your customers for the products or services, and how much you will sell each month. If you already have a pipeline forecast of business, then use this. It will also enable you to know how much you need to sell in order to meet your costs.
2. Determine fixed costs
These are exactly that, fixed costs that have to be paid – they might be monthly or quarterly and consist of IT support, website hosting, mobile phones, car lease, rent and payroll.
3. Add variable costs in
Your variable costs, by definition, follow the sales or service provision pattern for instance if you manufacture a widget, the material and labour cost, along with other consumables, are the relevant variables. The difference between the selling price and variable costs per unit is called the contribution. To break even you need to sell enough products or give enough services to generate sufficient contribution to pay your fixed costs. Contribution over and above this is invariably for you – your profit!
4. Forecast one off expenditure
Consider your business plan and what your growth plans are, you might require IT equipment such as new laptop for a new member of staff or a business course. If you have a sales and marketing plan this could be campaign costs such as advertising or for an exhibition. It is wise to include a buffer in here for any unforeseen expenses.
5. Put it all together and create your budget
Once you have collated all of the above it is time to put it all into your budget. This will give you a comprehensive view of what your financial situation looks like each month. Compare cash flow in with cash flow out across the year to see your profitability.
One of the most important things is to make certain that you keep an eye on your budget, don’t just file it as another job done on your list. It is a working document and very important to your business. It will help you to make informed financial decisions.
All of the above sits under the specific heading of Management Accounting a highly specialist and separate area of accountancy with its own Institute, The Chartered Institute of Management Accountants [CIMA]. Graham Cook, partner at GM & Co is a fellow and former branch President of this Institute and so is ideally placed to bring this highly commercially focused specialist expertise to the client base.
If you would like help creating or reviewing your budgets and forecasts or any of the other accountancy services offered by GM&Co, please give the team a call on 0121 550 8509 or email email@example.com.
Tagged as: Business planning
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