Running a business:
Budgets
Many businesses either simply do not prepare a budget or, if they do, allocate only minimal time to the task. If, for example, your budget is prepared by taking last year’s results and increasing them by 3% then your budget means very little and you are missing an opportunity to identify problems in advance and control the direction of your business. Take, for example, the sales budget. You know what you achieved last year but will next year be the same? Factors to consider include:
- increases to your sales prices;
- changes in your product lines;
- general market conditions, such as consumer confidence; and
- specific market conditions, such as new competitors in the market.
You should also consider the effect of any new initiatives, for example:
- an advertising campaign; or
- recruitment of additional sales personnel.
If your sales managers are involved in setting the budgets, then they may come up with some creative ideas and will be more motivated to achieve the targets. When setting targets, you should choose ones that will help your business move in the direction that you want it to go. It will not always be appropriate for sales targets, for example, to be based purely on the level of sales achieved. You may, for example, want to provide incentives to:
- find new customers;
- increase the sales of the more profitable products; or
- increase customer satisfaction in the quality of your service.
Preparing a budget and comparing it to your actual results can be a way of anticipating problems. If, for example, your sales are less than expected, do you know why? There may be action that you can take to increase your sales or profitability back to their expected level. For example:
- if the sales personnel are performing badly, consider how to motivate them;
- if a new competitor has entered the market, consider a promotional campaign; and
- if market conditions have turned against you, consider implementing cost cutting measures.
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Where next?
Within Financial information…- Preparing management accounts
- Effective management information
- Why you need financial statements
- Understanding your financial statements
Within Running a business
General…
