“A business without a system of budgeting and forecasting is like a traveller without a compass – they don’t know what direction they are going”.

No business can know exactly what the future holds.  But budgeting reduces the level of uncertainty, helping you anticipate problems, learn from the past and improve your ability to control the business.

Budgeting in the real world

Understanding common budgeting problems helps ensure your budgeting procedures work.  You must:

  • Involve the right people in preparing the budget.
  • Create realistic and up-to-date budgets using last year’s figures as a guide.
  • Use your budgets effectively. 
  • Using updated budgets lets you manage your cashflow and identify what needs to be achieved in the next budgeting period.

Forecasting sales

Sales forecasts are typically based on a combination of your sales history and how effective you expect your future sales to be.

Use your sales history as the basis for your forecasts, remembering that sales variations may occur. So:

  • Assess what sales resources you have, and how you will use them.
  • You may prefer to build up your sales forecast from separate forecasts for different products or geographical areas.
  • Take into account seasonal patterns in your business and industry.

 Forecasting costs:

  • Analyse your costs and how they relate to sales ie. fixed or variable.
  • Forecast your costs (either as a fixed amount or in relation to sales).
  • Control significant uncertain costs.

Preparing budgets

Use sales and expenditure forecasts to prepare your budgets which will include:

  • Forecast the timing of cash movements.
  • Include non-operating cashflow in your cashflow forecast.
  • Prepare a cash budget.
  • Prepare profit and loss and balance sheet budgets.

Budget analysis

Analysing your budgets gives you the chance to deal with potential problems before they occur:

  • Your cash budget projects your future cash position month by month.
  • Profit and loss budgets let you analyse projected margins and other key ratios.
  • Your projected balance sheet allows you to analyse stock turnover and other key figures.

projected figures with previous years to see where performance is improving or deteriorating.

Conduct sensitivity analyses to see how different outcomes affect performance.

If you need help in preparing your budgets or advice as to how to start the process please contact us.