Budgeting

All businesses need to plan ahead, the reasons for planning are:

- the business has a plan of where it is going and what it wants to achieve
- resources can be allocated to meet those expectations
- everyone is aware of what the businesses expectations are
- decisions can be made more easily
- progress towards those expectations can be monitored and measured and if necessary action can be taken to correct adverse situations
- it outlines what cash is required to fund the activity and provides an understanding of what the cash is to be spent on

From what has been outlined above it is obvious that the budget is an important management tool to both communicate where it is going and control performance during the budget period, the difficult economic climate of the past couple of years has only increased it's importance to businesses. Below are some tips that you may wish to consider in preparing the budget for your business:

- consider using zero based budgeting, adding 5% on to last years budget is easy, but having to justify the budgeted amount in total forces organisations to be much more aware of costs than simply adding a % on to existing amounts.

- get as much detail in the budget as possible, the more you drill down into your costs the better you will understand them and the more you will get from the budget, don't lump things together.

-don't allow costs to be moved from one account to another to compensate for over/under spending as this stops weak spots and trends from being identified.

- monitor actual costs against budgeted costs regularly and understand both over and under spends and be prepared to take action on what you see.

- understand how your costs relate to revenue, are they variable (move in relation to revenue) or fixed (changes in revenue have little impact on cost).

- you need to understand the effect the budgeted costs will have on the cash flows of the business so prepare a cash flow forecast to support the budget.

- prepare budgets for different levels of organisational performance, for example you could prepare an optimistic, expected and pessimistic budget (these are very useful for understanding how costs will behave at different operating levels but care needs to be taken on communicating these budgets as it could prove confusing to people as to which budget they are working to).

- consider using the budget to promote accountability and ownership amongst the workforce, should you decide to do that then you must also give the authority to control that part of the budget to the people concerned.

- don't just prepare an annual budget and rely on it, review it regularly and be prepared to change it if necessary.