Unfortunately, many business operators do not have a Budget. There is a fairly common complaint that accounting firms do not prepare Budgets for clients. However, there are accountants and consultants who are happy to prepare Budgets for SMEs.
The key information for a business operator to have is a summary of the probable results from current and future business activities. This is the business activity on which the leadership team can have influence.
It is too late to be worried about what happened previously!
It is what is happening now and in the future that is important!
What is included in the budget process?
It starts with the Business Plan or Strategic Review that has been undertaken by the Leadership Team, normally with an external coordinator. The plan has set the vision for the future. The Predictive Accounting Reports which include Budgets illustrate the vision in financial terms.
A Budget should be prepared for each business activity. We do not agree with the concept of preparing a Consolidated Budget. It is best to prepare the Budget for each activity so that it can be analysed by the person responsible for the performance of that activity.
Key Drivers are subaccounts for the key foundations on which the business is based, including materials inventory, completed stock, debtors, etc.
The Cash Flow Forecast includes postings from the Budgets as well as from the Key Drivers and highlights the Cash Flow Implications of various decisions that have been made in the Plan (included in Part 2).
The Projected Balance Sheet gives a “snapshot” of what the business’ financial position will be at a future date. This document conveys to the CEO the end result if the strategies outlined in the Plan are implemented (included in Part 2).
Budgets are best prepared for each individual business operation and not consolidated into an overall company Budget.
For each business unit, there is a need to consider how will the income be generated, what are the direct costs and the overhead expenses for that business unit.
For tradies, professional services and manufacturing businesses, the key component is the sale of labour. This requires an analysis to be prepared of the team, identifying individual team members or groups of team members within categories to show:
The business may also be manufacturing individual products which will then need to be analysed showing the product, the manufacturing cost plus the mark-up to determine the sales value.
In a retail/wholesale business, there is a different approach.
These businesses purchase a range of products that can be classified into separate stock categories based on expected sales volume (high or low) and mark-up target (high or low).
The Leadership Team needs to identify volume estimates for the stock being purchased, to identify which stock category that particular stock item relates to.
Calculations can then be prepared to determine the estimated sales value and the gross profit to be generated from those sales.
A review then needs to be made, to determine whether the sales of that combination of stock categories is going to generate sufficient gross profit to pay the overhead costs and generate a net profit that is in line with the leadership team’s target.
The “Budget process“ is very important for all businesses.
The Predictive Accounting Process comprises Budgets, Cash Flow Forecasts, Projected Balance Sheets and Key Drivers.
The “Key Drivers” are the key components in the budgeting process. To prepare accurate financial projections, key driver subaccounts are needed.
Some of the common key drivers are as follows:
Raw materials inventory:
Shows the purchases of raw materials, less the usage in manufacturing and the forecast quantity on hand and the value at any time. These figures need to be reviewed to ensure that sufficient quantity of raw materials are being purchased, that the quantity held will suffice any shipping delays but excess quantities are not being held, because this will have a detrimental cash flow effect.
Shows the completed stock from the manufacturing process or direct purchases, less the quantity of sales, to determine stock on hand quantity and the value. These figures need to be reviewed to ensure that, based on the firm’s budgeted sales, there is going to be sufficient stock on hand to meet customer requirements. Conversely, care needs to be taken to ensure that there has not been over investment in completed stock because this will affect cash flow.
Shows the sales made and the amount of cash received during a month in payment of debtors’ accounts. The closing balance needs to be reviewed to check what the “Debtors’ Days Outstanding” will be. If the “Debtors’ Days Outstanding” is too low, it will mean that the Cash Flow Forecast might indicate that the business has plenty of funds available when in fact, this might not be the case.
These are some of the examples of the “Key Drivers” which in the Predictive Accounting Process are the links to the Budgets, Cash Flow Forecasts and Projected Balance Sheets.
Budgets can be prepared for all types of Businesses, Charities and Not for Profit Organisations.
Look out for Part Two of “Budgeting is Important for Businesses. Charities and Not for Profits” next Thursday, 12 October 2023
If you are interested in having a discussion on how to implement a “Budget Strategy” for your business / organisation, please do not hesitate to contact Peter Towers, Accountant, Director, Company Secretary and Managing Director of Towers Business Development, on 1800 232 088 or .