Money is the life blood of business and it’s your most important consideration when building a business. Steve Jennings, director of business banking at Alliance & Leicester Commercial Bank offers tips for budgeting and business planning.

Structured business budgeting is key to managing your company’s finances. It enables you to concentrate available resources on improving profits, reducing costs and increasing returns on investment. Making this a formal process ensures that you have sound financial information on which to base decisions.

The main aim of an annual budget is to set out a clear financial picture of where you stand financially and what to expect over the coming year. This will help you determine if you need financial support.

A common error is for businesses to hope that they can somehow cover all expenses. Understand your requirements, work out how much you are likely to need and research the associated charges. For example, opt for an account that will only charge interest on the amount you borrow.

To create your budget, begin by looking at projected sales, direct cost of sales (materials, contractors etc) and fixed costs of the business (premises, staff and the other day-to-day costs involved in running the business). Include your own drawings and allow for tax payments.

Unless you are in a start up situation, you can begin with information of previous years’ sales and costs figures. Factor in any plans you have for growth, sales plans and any changes in the trading environment. 

Consider whether your business benefits from economies of scale. Do unit costs vary depending on the size of the order? Use your sales forecast to project peaks and troughs to help you gauge when costs will fluctuate, enabling you to get the best price for goods.

Projected cash-flow

Your cash budget will indicate the situation on a month-by-month basis and this should be reviewed on a monthly basis. Constantly monitoring cash-flow is vital for a small business as it means you can identify any specific difficulties and manage spending.

Costs 

Most businesses have fixed costs (rent, salaries, leasing costs), variable costs (raw materials, temporary staff) and capital costs (one-off purchases of equipment). To budget for costs, look at last year’s expenditure and allow for factors such as inflation, interest rate changes and projected salary or rent increases. If you rely heavily on purchasing, obtain quotes from suppliers.

Revenues

Revenue or sales forecasts will be based on historical performance and the prospective growth anticipated in your business plan. Be realistic in forecasting. You may be setting ambitious targets for business growth but you cannot plan your expenditure on a reliance that these will be achieved.

By using your sales and revenue forecasts, you can assess projected profits for the coming year which enables you to analyse margins and return on investment. Understanding your profit margin – the difference between sales and costs – is the only way that you can properly assess the performance of your business and return on investment.

Keep your budget under review

Up-to-date budgets enable you to manage cash-flow and identify what actions need to be taken in the next budgeting period. You can compare actual income and expenditure against the budgeted figure and identify reasons for variations, building that information into your forward planning.

Alliance & Leicester Commercial Bank has operated as a dedicated business finance provider for 40 years and offers a full range of banking services to businesses of all sizes. 

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By Steve Jennings  on   Jul 03,2008

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Keywords

budgeting    business planning    money    cashflow   

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