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Understanding accounts series


Many small business owners run their businesses in an apparently careless way and when asked if they prepare a budget are often likely to say ”What’s the point? I’m in charge and I know what’s going on”. But how many of these business owners during their financial year then run out of cash and start hitting problems with the bank or even paying wages? Many don’t but even those who don’t hit problems, by having no budget in place are possibly not making as much profit as they might, so lose out in other ways!

What is a budget?

It’s a four-letter word: plan. A budget is a plan to: Control your finances and your operations – it’s not only about money. It’s about other targets too such as margins, sales volumes, average invoice (sale) value. You just need to think of it and you can set a plan for it. Ensure you can continue to fund your current commitments. Budgeting helps you see the importance of not letting credit control slip from 30 days to 45 days. Enable you to make confident financial decisions and meet your objectives, although you will also need some management accounts to do this well (see factsheet on management accounts). Ensure you have enough money for your future projects. It sets out how you will spend and sell over the course of the budget period which could be a month or a quarter or a year. For it to work effectively you need to create the budget at the beginning of the period you are planning for: I know that seems obvious.

So why would a small business owner bother?

Here are just a few benefits of investing some time at the beginning of your year: Managing your cash by knowing how much you should have Identify opportunities for investment Check how you’re doing in year Move your business forward by achieving your targets Sensible decision making – with reference to your overall objectives for the year Spot problems while they are tiny and prevent them becoming enormous By giving your team some budgets to work with, help motivate them to perform better

How do you make a budget?

Here’s a list of things you need to do: Set aside some time to do it First time you do this you will find it challenging but remember that nothing that is easy is ever worthwhile. It takes time to become an expert but accept that and do it anyway. Start off with last year’s numbers It assumes that last year was OK, and it seldom is or was, but it’s a start. It assumes of course that you have last year’s numbers by the time the end of the year comes along. Sort of a catch-22, really. To do this really well you should be having monthly management accounts (see our management accounts jargon-buster). Be sensible First of all, check out last year and figure out what was exceptional and exclude those numbers. Exceptional is unusually high sales, one-off expenses eg upgrading your IT, the end of a contract hire agreement. Once you’ve got that, think about what you need to spend this year – non-regular, one-off expenses – and decide when you will spend it. By that time, you’ll know how much you need to have in sales to make it all stack up. You also need to think about your key performance ratios such as gross margin and use that to work out your extra costs associated with the extra sales. These are the variable costs and you'll find out more about them in our factsheet on overheads. Remember to keep a note of your key business targets so you can check how you are doing during the year. Don’t try to fly solo – especially first time Involve your team – they actually know much more than you give them credit for most of the time. And involve your accountant – especially if he or she has experience of doing budget preparation!


The information contained within this factsheet is factual but may contain opinion and express different ways of considering the topic. No responsibility is accepted by NGM Accountants for any losses or profits foregone by acting on or refraining from acting on any information contained within this factsheet or any factsheets to which this refers. Before making any decisions concerning the accounts of your business or enterprise, you should consult a professionally qualified accountant. Return to Advice page.