What your budget should include
Many small businesses have one overall operating budget that sets out how much money is needed to run the business over the coming period (for example, a year). As your business grows, your total operating budget is likely to be made up of several individual budgets:
Projected cashflow - your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly.
Costs - typically, your business will have three kinds of costs: fixed (eg rent, salaries), variable (eg raw materials, overtime) and one-off capital costs (eg equipment purchases). To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.
Revenues forecasts (sales forecasts). Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment.
Using your budget to measure performance
Your business budget can also work as a financial action plan. Budgeting can:
- show the costs and revenues for each of your activities
- provide information and support management decisions throughout the year
- be a way of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income
Comparing your business budget year on year can be an excellent way of benchmarking your business' performance - for example, you can compare your projected figures with previous years to measure your performance.
You can also compare your figures for projected margins and growth with those of other businesses in the same sector, or across different parts of your business.
Key performance indicators (KPIs)
To boost your business' performance, you need to understand and monitor the key drivers of your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.
The three key drivers for most businesses are:
- working capital
Any trends towards cashflow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot cashflow problems early on if they are calculated on a consistent basis.