What is a Budget?
A budget is essential for any business, to set out its future financial aims. It can cover any period, but typically businesses prepare a detailed plan for at least the next 12 months. This might be supplemented by a less detailed forecast for future periods. As well as a profit and loss account, it is usual practice to prepare a fully integrated suite to include a balance sheet and cash flow forecast.
Why Prepare a Budget?
A business budget has many different purposes. Its most common use is to review and benchmark actual results, which helps to spot areas of under- or over-performance. These items can then be analysed to understand the causes. Strengths can be exploited further and weaknesses addressed. As an expression of future expectations, a budget will indicate intervals at which asset purchases, funding and/or additional staff will be required. A budget will almost certainly be requested, alongside a formal business plan, in support of a funding application.
Types of Budget
For a relatively small business, it may be sufficient to set a single budget at the start of each financial year. However, more complex businesses may need to revisit their original plan throughout the financial period and prepare a re-forecast. This may also be necessary if there have been any unforeseen events.
Cash Flow Forecast
It is arguably more important to prepare cash flow forecasts on a regular basis, alongside the profit and loss account. These are used to track expected movements in cash balances. Businesses do not normally fail because they do not make a profit, but because they run out of cash. It is usual practice to have a detailed cash flow forecast, showing individual transactions, covering a relatively short future period, with less detailed information for later periods. Whilst not essential, a balance sheet forecast will provide useful data as to how each component will change during the plan period, and can help track movements in working capital.
How We Can Help
It can be difficult to know how to go about constructing a business budget and integrating the various constituent parts. Marches Business Consulting has considerable experience of preparing business budgets and cash flow forecasts, and can work with you to put a process in place.