Developing a budget
Budgets are one of the most important business financial statements. If planned and managed well, a budget allows you to monitor the financial impact of your business decisions, operational plans and its success.
Your budget is an important tool for projecting what the business will be doing in the future. It should align with your business plan and can then help you identify the financial implications of your business goals and activities.
Your budget is a summary of expected income and expenses for the budget period and relates to the activities and timelines in your business plan. This is usually one year, although the period can be shorter or longer, depending on how you are going to use the budget.
To develop a budget that is useful and relevant you should involve all key staff from the start, ensuring the goals of the business are clearly understood.
Steps for developing your budget include:
- reviewing your business plan and noting all required activities for the budget period
- separating activities into existing and new for the new budget period
- identifying and documenting all assumptions that have been made for the budget period
- reviewing the prior year's profit-and-loss statements by regular periods (monthly or quarterly)
You should document your budget according to how you will review it. For example, if you will review it monthly against your profit-and-loss statement, then the budget should be presented monthly. If you will be reviewing it quarterly, then present it quarterly.
Monitoring and managing your budget
Regular reviews of your budget against actual results will reveal whether your business is on track to achieve the goals set when you first prepared your budget.
You should review your budget against your profit and loss statement regularly (monthly or quarterly depending on your plan). You should compare the actual results from the profit-and-loss statement with the budgeted results, then note and analyse any variances. The reasons for the variances should be noted on the reports for future reference. You should also note whether the variance is a 'timing' or 'permanent' variance.
- A timing variance is where the estimated result did not occur but is still expected to happen at some point in the future.
- A permanent variance is where the expected event is not likely to occur at all.
By documenting each variance for future reference, you can take action to counteract future variances, or implement new or improved activities to ensure the strategic goals that underlie the budget can still be achieved.