15.04 – Business Budgeting for Beginners
One way to turn satisfactory business results into exceptional ones is to set specific goals. While a long-term business plan is crucial, budgeting provides more immediate targets and actionable steps. Budgets set goals in terms of revenues and expenses for the year ahead, typically reviewed halfway through the year or quarterly. This ongoing process, known as a rolling budget, ensures that you maintain a one-year horizon at all times.
Think of a budget like a coach setting improvement targets for an athlete. In business, you set financial goals, monitor performance, and adjust as needed to stay on track.
Setting The Guidelines
Your budget should follow these general principles:
- Realistic but Challenging Goals: Combine top-down aspirations with bottom-up forecasts from employees or departments responsible for delivering the results.
- Prepared by Those Responsible: Salespeople should prepare the sales budget, and production teams should prepare the production budget.
- Agreed by All Involved: Several versions of a budget may be discussed. For example, if the boss wants a sales figure of £20,000 but the sales team forecasts £15,000, an agreed figure of £18,000 may be reached. This agreement represents a commitment from employees to achieve the target and from the employer to provide necessary resources.
- Finalized Before the Start of the Year: Complete the budget at least a month before the new fiscal year begins.
- Regularly Reviewed: Periodically review the budget throughout the year to ensure assumptions still hold. Accurate performance information should be available seven to ten working days after each month’s end.
Analyzing the Variances
Understanding variances between budgeted and actual performance is crucial. Monitor and compare performance against the budget monthly, taking corrective actions as needed.
Fixed Budget Example
Looking at Table 16-1, the business is behind on sales for the month but ahead on the yearly target. Unfavorable variations are shown in brackets. Higher-than-budgeted sales figures don’t have brackets, but higher material costs do. Although profit is running ahead of budget, the profit margin is slightly behind due to higher direct costs like labor and distribution.
Flexing the Figures
A fixed budget is based on specific sales goals, which are rarely met exactly. Flexing the budget involves adjusting expectations based on actual sales. For example, if materials were budgeted at 78% of sales, and actual sales were higher, the materials cost would be adjusted accordingly.
Flexed Budget Example
Table 16-2 shows a company that used £762,000 more materials than budgeted. When sales exceed budget, this isn’t surprising. Flexing the budget reveals a more accurate picture: the company spent £19,000 more than expected on materials given the higher sales, rather than the £762,000 overspend shown in the fixed budget.
Budgeting from Zero
Traditional budgeting often starts with last year’s costs and adjusts upwards. Zero-based budgeting, however, starts from scratch each year. Every cost center begins with zero spending, and each pound planned for expenditure must be justified. This approach ensures that all spending is aligned with the business’s goals and resources.
Tools and Resources
Vertex42 offers professionally designed financial templates for business use, including balance sheets, income statements, and budget trackers. Visit their website at Vertex42 Business Templates to download a variety of free business spreadsheets.
Conclusion
Effective budgeting is crucial for setting and achieving business goals. By adhering to realistic but challenging guidelines, regularly reviewing and adjusting budgets, and using tools like zero-based budgeting, businesses can optimize performance and drive exceptional results.
