In last week’s blog, we looked at the benefits of having a business budget. This week we will cover how to create one. Before you start, you will need access to your accounts and some other information. Some of the documents that are helpful include:
- Profit and loss statement
- Balance sheet
- Trial balance
You can use these reports and other information to get the figures you need to create a budget and make forecasts.
Income and Expenses
Start by determining how much money you make per month and per year. This includes sales of your products or services, and any other sources of income you have. It is often helpful to split the income you make into two figures – the income you are fairly sure you will receive (from contracts already in place, for example), and the income you think you will receive (from predicted sales). The latter number is a forecast, so make sure it is realistic.
Next, have a look at your expenses. This includes fixed and variable expenses. Adding fixed expenses is the easy part of creating a budget as the figures are easy to find, define, and include. The variable expenses are harder to identify and forecast, but your budget will be more relevant and accurate if you take the time to do so.
You should also forecast and include one-off spends. Often this is for equipment or special projects or initiatives. Try also to include predictions for the unexpected. For example, is it possible you might need to buy additional computer equipment over the coming year because of a failure, even though that is not part of your IT plans? Include this in your budget too.
Putting it Together
Other information you will need is the value of your business (according to your balance sheet) and the trial balance. Now you can use this information to create a budget. This simply involves pulling all the figures together so you get a monthly overview of the state of your business over a set period of time.
Doing this will show you the months where you will make good profit margins, and the months where lower sales or higher costs reduced those profit margins.
With your budget you can start making plans for your business. This could be something as simple as ensuring you have enough money in your marketing budget to spend at peak periods, enough cash to cover payroll in slow periods, or enough money to meet your tax obligations. Your budget can also help you make more complex plans, such as when to launch a new product, expand your business, or embark on other initiatives.
You can also begin experimenting with different scenarios. To do this, change the figures to increase and decrease your sales, change your fixed costs, add in additional one-off expenses, etc. What effect do these scenarios have on the health of your business, and how do they impact on your plans?
It takes a bit of time creating a business budget, but they make it easier to predict the future and improve your decision making abilities.
For more help with budgeting or anything else in your business, please contact a member of the Gilroy Gannon team today.