Why budget?

Budgeting is relevant to all businesses particularly when profit margins are squeezed or changes planned. Successful businesses usually result from careful planning which includes predicting results through a Budget. Budgeting your business shows that you are in control of your business, not that your business is in control of you.

Forward Budget (Trading Forecast)

As part of the overall forward plan the forward budget is your best attempt at estimating your anticipated sales and costs, indicating your estimated profit. Budgeting techniques can be used to budget individual elements of your trading activities.

Partial Budget

A technique used to calculate the effect of changes to a budget without the need to rework the whole budget.

Break-even Budget

A break-even budget is used to estimate the minimum performance level of an enterprise if it is just going to cover costs. It is useful when the exact level of return is difficult to predict. A break-even budget can only measure change in one element at a time with all other elements remaining the same. But each element can be measured in turn.

Capital Budget

Whatever the budgeted profits, they are required to fund certain things.
· Taxation
· Drawings
· Shareholders dividends
· Repay borrowings
· Re-invest in the business - capital expenditure

Capital planning is just as necessary as profit budgeting.

CAPITAL PLANNING

Factors to Consider

· Any capital replacement policy you have.
· Factors influencing you when considering replacing or renewing capital assets.
· Why you need to plan capital expenditure ?

Two further questions it is necessary to ask:

1. How can it he financed ?
· HP
· Lease
· Overdraft
· Loan
· Retained profits
2. Can you really afford it ?
3. What is the pay-back period.

MONITORING THE PLAN

Monitoring the budget and cash flows on a regular basis will give early warning of sales targets not being met and/or cost estimates being exceeded.

Planning to go on a first time car journey from say, London to Newcastle would require you to plan the route in advance. During the journey you would cheek the signs on the route to ensure you were on the right roads. If you realised that you were lost, a quick reference to the planned route map would assist you to get back on the correct path as soon as possible and so suffer a minimum amount of time loss etc. This is just like monitoring a budget.

Whatever the budget results there is one other important aspect to monitor and understand. The cash flow. The flow of cash within the business is the life bloods of the business. Interrupt or restrict the flow can cause untold damage to a business. It is true to say that almost all businesses which fold, do so because they have run out of cash.