Once your business is up and running, or ideally even sooner, you need to start thinking about a budget. If you don’t have a budget, you won’t know whether you have enough available cash to support your business until you start making profits, and until you start being paid.
Don’t worry if you’ve not done a budget before. Its not rocket science. What you are trying to do is to come up with a reasonable estimate of how much you are going to sell, and how much you are going to spend.
If your business has investors, or owes the bank money, then they will almost definitely want to see your budget. Even if nobody else asks to see it, you should still do a budget regularly as it is a key tool for controlling expenditure and managing your business.
When to do a budget?
Ideally you ought to do a budget before you first start trading. Many companies then go through a formal budget process once a year, and then revisit it to “flex” (i.e. adjust) the budget at regular points during the year – maybe quarterly or even monthly. The more often you update it, the better you will understand your business and your financial position, and the better you will be able to manage it.
Profit and loss vs. cashflow forecast
A budget profit and loss account tries to match the timing of your sales with the timing of your expenses. In other words if you show a sale in January, you show the costs of that product in January, even if you bought your stock a couple of months before. This helps you to see how your business is performing.
A cashflow forecast looks at when you actually receive cash in, which could be several weeks after a sale, and when you actually pay cash out. This shows you how much cash you can expect to have in the bank, and whether you will need to get extra investment or another loan.
What does a budget look like?
At a minimum you should do a budget for a 12 month period, broken down by month, which shows what turnover (sales) you expect to make, and what expenses you are going to incur by category.
See the below example showing 3 months worth of a profit and loss account budget for a company that sells 2 products.
|Cost of sales product A||77||81||85|
|Cost of sales product B||54||77||54|
|Net profit (loss)||(1)||(3)||7|
If your business is new then estimating sales is difficult. Try researching local competition, or calculate how many sales you think you will make based on advertising spend.
If your business is already up and running then you can make assumptionsfor sales growth based on how things have been going for the last few months, or based on seasonal trends.
Make sure you are realistic – there is no point doing a sales forecast that is completely unachievable!
Cost of sales
If you have a good understanding of your costs for each product then this should be easy – if your sales estimate assumes you are going to sell 10 of product A, then your cost of sales estimate will have 10 lots of product A cost. If not then you really need to sit down and figure out what the cost will be including raw materials, manufacturing cost, etc.
Other costs (overheads)
A lot of these costs should be fixed costs, and therefore easy to include in your budget as you should know exactly what they are. For example rent costs you can just take from your rent agreement. Advertising and marketing costs are very important ones to budget and you should be thinking about what you are going to spend on marketing when you are trying to estimate your sales.
You need to spend quite a lot of time making sure that you have included all your costs. For example:
- Employers National Insurance Contributions
- Professional fees
- Shipping costs
- Office supplies
Should I budget for a longer period?
If you are working on your business plan then you should prepare a budget for a minimum of 3 years. Some investors / lenders ask for 5. Only the first year needs to be monthly, after that quarterly is fine, or annual numbers for years 4 and 5.
If you’re not sure how to get started, or need help with some of the detail, then either post a question as a comment, or contact me.