‘Budgeting and forecasting’ is a term that can induce panic and a lot of confusion, especially for a small business owner. But setting up budgets and forecasts for the upcoming financial year is something every business needs to put into place.
Simply put, your budget is your planned revenue and expenditure for the quarter or the year. Your budget will outline what you will spend your money on and how that spending will be financed.
In writing up your budget, ask yourselves these questions:
- What are the projected sales for the budget period? (be realistic here)
- What are the direct costs of sales to make the product or supply the service? (for example, costs of materials, components or subcontractors)
- What are the fixed costs or overheads? (for example, rent, water, vehicles, printing, advertising, website domains, travel, legal and insurance costs)
Budgets are normally prepared monthly or quarterly and is the most effective way to:
- control your cashflow
- ensure you can continue to fund your current commitments
- enable you to make confident financial decisions and meet your objectives
- ensure you have enough money for your future projects
So where your budget is a planned outcome of the future, your financial forecast predicts the future of your business.
Your forecasts are prepared more frequently (often monthly, sometimes weekly if you’re a start-up), and are used to help plan a more accurate budget. The figures used in your forecast are predictions based on the past and current trends in your financial statement.
Examples of forecasts include:
This projects your future cash position on a month-by-month basis. It also helps you keep on top of your bills and is useful when seeking finance. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having.
- Fixed costs (rent, salaries and financing costs, etc)
- Variable costs (including raw materials and overtime)
- Once-off capital costs (for examples, purchases of computer equipment or premises)
This forecast will be based on a combination of your sales history and how effective you expect your future efforts to be.
The benefit of these forecasts means that you are able to measure where your business is going, and help you avoid any problems before they happen. It will also help you prepare projected profits for the next 12 months.
Should you require assistance in putting your budgets and forecasts together do not hesitate to reach out via www.diga.co.za.