Are we using budgets to manage finances?

This question outlines the advantages of budgeting and explains how to go about it. It suggests action points to help you manage your businesses' financial position more effectively and ensure your plans are practical. It is essential to plan and tightly manage your business' financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

Businesses fail because they spend more money than what they are receiving and they often do that because they do not know what their expected expenses and income is. Budgeting is the most effective way to control your cash flow, allowing you to invest in new opportunities at the appropriate time.

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year.

Benefits of a business budget

There are a number of benefits of drawing up a business budget, including being better able to:

Manage your money effectively; allocate appropriate resources to projects; monitor performance; improve decision-making; identify problems before they occur - such as the need to raise finance or cash flow difficulties and plan for the future.

Creating a budget

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, and should not be complicated. You simply need to work out what you are likely to earn and spend in the budget period. Begin by asking these questions:

What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.What are the direct costs of sales - i.e. costs of materials, components or subcontractors to make the product or supply the service?What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.: Cost of premises, staff costs, utilities, vehicle expenses, equipment costs etc.

Your business may have different types of expenses, and you may need to divide the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

Once you have figures for income and expenditure, you can work out how much money you're making. You can look at your costs and work out ways to reduce them, as well as seeing if you are likely to have cash flow problems, and giving yourself time to do something about them.

Review your budget regularly

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas. But just as important, if you are not achieving your sales budgets you have to cut costs to remain profitable. Successful businesses often have a rolling budget.

Leslie Tayne said - “Budgeting has only one rule: Do not go over budget.”