Setting Budgets

What this topic is all about Setting budgets is a key part of management and financial control for a start-up Budgeting is: A part of business planning About allocating limited resources Used to monitor performance and take corrective action

What is a budget? A financial plan for the future concerning the revenues from sales and expected costs of a business over a period of time.

Types of Budget Sales Revenue Budget Expenditure Budget Profit Budget

Why businesses use budgets Measure whether key objectives and targets are being achieved To control expenditure – by allocating who can spend what (“budget-holders”) Provide sense of direction (focus and targets) Monitor actual results against budget

Sales Budget - Introduction Putting a sales budget together is often hard for a start-up Perhaps no experience of the market No existing customers or sales history Have to predict sales volumes and prices Sales budget needs to take account of market research Realistic view on sales volumes and prices Assumptions made about the timing of sales and which channels they will come from (e.g. sold direct or via distributors)

Sales Budget – Example (1) In this example, a total sales budget has been prepared for the year. Sales are calculated by multiplying budgeted sales volumes (quantity) by the budgeted selling price. Sales Budget Qty Selling Sales Gas Boilers Price (£) £ Installations 250 £1,500 £375,000 Repairs 500 £400 £200,000 Maintenance 1,000 £100 £100,000 Total 1,750 £675,000

Expenditure Budget - Introduction The expenditure budget is a vital part of planning a start-up Business likely to incur costs before it starts trading Need to ensure it has sufficient cash to pay for the costs Poor control of costs may lead to business failure Ideally, the expenditure budget is prepared in as much detail as possible Overall objective – needs to be complete and prudent

Expenditure Budget - Example Jul Aug Sep Oct Nov Dec Total Category Rent 2,500 5,000 Rates 500 1,000 Salaries 1,500 9,000 Marketing 2,000 6,500 Heat & Light 275 300 1,725 Vehicle hire 550 3,300 Computers 3,000 250 5,500 Travel 100 1,250 Other 9,425 7,425 4,375 7,350 5,850 4,350 38,775

Profit Budget - Example In this example, the profit budget shows the business making a loss in May & June (total costs greater than total sales) but a profit overall (£11,000 for the four months) Profit Budget May Jun Jul Aug Total Total Sales 16,000 18,000 30,000 35,000 99,000 Total Costs 19,000 20,000 24,000 25,000 88,000 Profit \ (Loss) -3,000 -2,000 6,000 10,000 11,000

Variance Analysis Page 145

Limitations of budgets Budgets are based on estimates and assumptions – actual results always turn out differently Start-ups have no trading history Setting and monitoring budgets takes time – it shouldn’t get in the way of building the business Limited motivational effect, particularly if the start-up doesn’t have any employees

Setting Budgets