Prepare a Business Budget

Take time to prepare a business budget every year, it is so important. As a small business you should take your forecasting and budgeting very seriously. From this article you will gain from the expertise used by a large business and in particular the way every decision is queried and the markets researched at the outset. At the end of the budget an important cash flow statement is prepared which will indicate the level of additional financing required to cover the budgeted growth of the business.

How Important is the Budget?Prepare-a-business-budget

Within a large business we would spend between two and three months preparing our budget for the next financial year. Each department in the business would submit its own budget and would then have to “fight their corner” to gain approval from the MD. The budget is hugely important as it presents the guide against which your actual monthly results will be compared. Having a budget to compare actual monthly results with can prompt the early warnings of all sorts of possible problems within the business. Sales not meeting expectations, problems with production, overheads getting out of control and cash flow warning signals.

The Capital Budget

Every departmental manager is required to submit a capital budget, listing the items of capital expenditure they request for the coming year. The capital items will include plant, machinery, vehicles, office furniture, office equipment etc. Each item requested will be accompanied with a report detailing why the item is a beneficial or essential addition.

The case for buying capital items has to be substantial. Is it right to buy the latest, fastest machine? Do we have the production to warrant the purchase or is the machine going to stand idle for much of the working week? We need to consider the financing costs involved as well as the additional depreciation charges – will the added efficiency cover these costs two or more times over?

The Personnel Budget

Our departmental managers will be presented with a list of personnel within their control and will be required to submit the numbers of staff required for the coming year. The manager should present a description of the work done by each member of his/her staff. This is also an opportunity to look at the rate of absenteeism, upcoming retirements and also whether there is a case for additional pay for any member of staff beyond the annual increase (e.g. taking on more responsibilities, gaining a qualification, exceptional sales results).

The Sales/Orders BudgetThe-marketing-budget

This budget will stem from a sales conference which would have informed the sales force of any new products planned for the new year and changes/deletions from the current range. Each member of the sales staff will be in possession of his/her sales this year to date and will be required to enter their expectations for the remainder of the year. They will then be required to estimate the sales they will make in the following year. The sales manager will give a report on the market conditions and present a summary of the sales predictions for the coming year.

The MD will want to see each salesperson’s predictions from the previous year compared to the actual sales they have achieved and will question the sales manager at some length on the reliability of the new year’s predictions. Finally, a realistic sales budget, product by product, will be agreed for the coming year. The final budget will show home market sales separated from export sales and will also show a month to month analysis of when the orders can be expected.

The Purchases Budget

The supply of raw materials is crucial and the buyers will report on the market for metals, cloths etc. They will present their expected material prices and the currency exchange rates they have used in these calculations.

The Production BudgetThe-production-budget

Once the sales budget has been agreed and the sales allocated to each month of the year, the production planners can schedule the factory production to meet the sales timetables. Production planning is a complex skill, arranging production in the most efficient combinations. The production budget will calculate costs such as machine idle time, productive and non-productive labour hours and much more. The production budget will also include fixed and variable factory costs. The fixed factory overheads, which remain the same irrespective of production levels, will include the rent and rates apportioned to the factory area of the building and depreciation of the plant and machinery. Variable factory overheads will include the gas, electricity and water used by the production area and many other expenses such as consumables, small tools, machine servicing, holiday pay, overtime premium payments etc.

The General Overheads Budget

Our overheads will be allocated under four headings:

Sales and Marketing Costs:

  • Website costs and SEO charges
  • Promotional Costs including trade shows and advertising
  • Travel and Entertaining
  • Commissions

Distribution Costs:

  • Motor vehicle Costs
  • Carriage and Postage
  • Packing Materials

Administration Costs:

  • Salaries
  • Admin Area Rent, Rates and Power
  • Repairs and Renewals
  • Insurances
  • Printing and stationery
  • Telephone and Internet Charges
  • Computer Software and Consumables
  • Subscriptions

Financial Costs:

  • Professional Fees
  • Bank Charges and Interest
  • Bad Debts
  • Depreciation Charges

Trading and Profit and Loss Statement

At this stage the individual budgets can be combined to arrive at the net profit budgeted for the next year. Are we arriving at the profit growth we need to target? Possibly we might need to reconsider some of our projections, maybe cut back on overhead spends etc.

Scheduling The Income and Costs

When we have agreed the net profit included in the budget we will move onto scheduling our budgeted income, expenses and capital spend to the months over the year. Much of this will already be concluded for the sales and factory production budgets. In some cases the overhead costs may be allocated according to the number of days in a month or the number of productive hours in a month.

The Cash Flow Statement

Once all the budgets have been completed and allocated over the months of the new year we can complete an extremely important schedule. We complete our cash flow month by month taking into account all cash movements and not forgetting to include the business taxes we will be scheduled to pay on our business profits.


By the time we have completed our budgets we will have considered every detail of our business and have a working plan for the coming year. We will be confident we understand the market, know the sales we can achieve and have set out exactly what capital spends we will make and what overheads we will incur.

No matter the size of your business, you need to ask if there is more you can do to prepare for your coming year. Having made realistic forecasts and budgets you will have figures to compare your actual monthly results and if necessary may have to make timely adjustments to your expectations and the additional cash requirements any changes may incur.

If you have any comments or questions on the subject of budgeting please add them below and I will be very pleased to respond.


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