Checklist
This checklist outlines why budgeting plays a key role in business and why it is equally important to all businesses, no matter what their size.
Definition
Many businesses that are under pressure overlook budgeting, because with already tight schedules they feel they can do without extra work that may seem to be unproductive. In fact, budgeting can save time, as it helps you to prepare for the future and anticipate problems before they occur.
A budget is basically a translation of your business plan into numbers. In its simplest form, a budget is a detailed plan of future receipts and expenditure. You can use your budget to confirm the activities you have planned for the coming year. Can you afford additional staff? Do you need to expand? When should you start a new sales campaign? When are the slow periods, when making ends meet is a challenge? There are no fixed time periods for budgets, but generally they coincide with the financial year. Businesses normally divide the budget into manageable areas, for example sales, production, materials purchasing, marketing, etc.
The sales budget is normally calculated by multiplying the expected number of sales by the selling price of the product.
The production budget will be made for the proposed flow of stock, using unit numbers instead of financial figures.
The materials purchasing budget will use the figures proposed on the production budget to determine the amount of raw materials needed to manufacture the necessary number of units.
The staff budget determines how many staff you will need for the operations of the business.
The overheads budget can be compiled either by apportioning the overheads to each product/service or by keeping the overheads as a single budget.
The capital expenditure budget covers the purchase of land or buildings, the hire of equipment, etc.
These individual budgets all come together to create the master budget. You can use this to compare actual results with anticipated goals. If some of your expenses are higher than you expected, do you need to look for ways to cut them, or is it because business has increased? If your sales aren’t on track, what has caused the difference? Use the information constructively, so that you can make adjustments immediately, if needed, and improve your next budget.
Knowing what all your business activities will cost, and when such expenses will occur, will help prevent any unexpected surprises that could lead to financial problems down the road.
Advantages
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Budgeting can help save time, because it helps you to prepare for the future and anticipate problems before they occur.
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Your budget can be used to assess whether your present profit is adequate. In a small business, the profit should be large enough to make a return on your investment and a return on your own work.
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Being aware of what business activities will cost, and when such expenses will occur, will help to prevent any unexpected surprises that could lead to financial problems down the road.
Disadvantages
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Protracted budget evaluation could divert key resources away from core business activities, potentially resulting in the business overlooking valuable opportunities.
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Some numbers depend on judgments, estimates, and interpretation, because certain factors might be highly relevant but cannot be reliably measured.
Action Checklist
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Use your budget to validate the activities you have planned for the coming year. Will you be able to afford to expand your facilities or equipment? Can you employ new staff? When would be the best time to launch a new product?
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Do you have times when sales are slow? If so, how can you meet that challenge?
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Compare your budgeted figures with your actual results. Then, ask yourself why the numbers are different. If some of your expenses are higher than you expected, do you need to look for ways to cut them, or has the volume of business increased? If your sales are not on track, what has happened to cause the difference? Use the information constructively, so that you can make adjustments immediately, if needed, and improve your next budget.
Dos and Don’ts
Do
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Use your budget as a benchmark to check your progress toward your business goals.
Don’t
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Don’t overlook budgeting. Being unaware of what all your business activities will cost, and when such expenses will arise, could lead to problems.
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