How to prepare a budget
Thomas Paine, the great revolutionary writer, is supposed to have said ‘People don’t plan to fail, they fail to plan’. His words of wisdom can certainly be applied to budgeting. Planning (together with foresight) is acknowledged as the best way to avoid financial problems. A well-planned budget helps you to collect and use information about the day-to-day functions of your business and to spot problems before they derail your business plan. Here are the steps to follow in developing your next budget...
1. See budgeting as a vital management tool.
Your budget process consists of three main parts - forecasting revenue and expenditure, recording actual revenue and expenditure, and reporting and acting on variance between the two. Budgets usually evolve from business plans and, therefore, will change over time. Your first budget may be nothing more than a statement of targets. In subsequent years, with established benchmarks and an improving track record, you'll be able to make more accurate projections. Eventually, your budget will provide a detailed, accurate comparison of your actual and desired performance.
2. Consider revenue and expenses separately.
Avoid trying to balance your receipts to expenditure in the first instance. Revenue is a product of your business plan and will have a ‘lag’ component - a start-up period before the cash starts flowing, anything from a couple of months to a couple of years, depending on your business. Expenses are your costs of resources and they will probably dominate in the early days.
3. Identify and list expenses.
The first step in costing your resources is to identify what those line items might be. A useful definition of a line item is one to which a monthly dollar value is assigned, such as accommodation, staffing, advertising, electricity… Many of these items are fixed expenses and this makes the task relatively straightforward. Begin by selecting broad headings and list in detail the line items or resources associated with each. Under ‘Administration’, for example, you might include stationery and office rental. Under ‘Utilities’ may be listed electricity and telephone.
