Decide how many budgets you really need. Many small businesses have an overall operating budget showing the amount of money needed to operate the business during the coming period, usually one year. As part of your growth, it is likely that your total operating budget is made up of several individual budgets, such as your marketing budgets or sales.
What your budget should include
The projected cash flow – your cash budget projects your future cash position month by month. Establishing a budget in this sense is vital for small businesses because it can identify any difficulties you may have. It must be reviewed at least every month.
Costs – typically, your company will experience three types of costs:
• fixed costs – items such as rent, salaries and financing costs
• variable costs – including raw materials and overtime
• isolated capital costs of capital – the purchase of computer equipment or premises, for example
To predict your costs, it may be useful to examine the records of the previous year and to communicate with your suppliers to bid.
Turnover – the forecast for sales or revenues are typically based on a combination of your sales history and the efficiency you expect of your future endeavours. Using your forecasts for sales and expenses, you can prepare projected profits for the next 12 months. This will allow you to analyze your margins and other key ratios such as return on your investment.
Use your budget to calculate the return
If you base your budget on your business plan, you will create a financial action plan. This can have many useful features, particularly if you look at your budget periodically as part of your annual planning cycle.
Your budget can be used:
• indicator of costs and revenues relating to each of your activities
• in order to provide information and support management decisions throughout the year
• means of surveillance and control of your business, especially if you analyze the differences between your current income and your income budgeted
Comparing your budget from year to year can be a great way to benchmark the performance of your business, you can compare the numbers you have projected, for example, in previous years, to calculate your performance .
You can also compare your figures for projected margins and growth to those of other companies in the same sector, or in different parts of your business.
Key Performance Indicators
To increase the performance of your business, you must understand and monitor the key drivers of your business. A trigger is something that has a major influence on your business. There are many factors influencing the performance of each company, so it is vital to focus on a few of them and monitor them carefully.
The three key triggers for most companies are:
• working capital
Any trend in cash flow problems or falling profitability will be visible in these figures when calculated in relation to your budget and your expectations. They can help you spot problems early if they are calculated consistently.