1. Setting Budgets

2. 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

3. 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.

4. Types of Budget
Sales Revenue Budget
Expenditure Budget
Profit Budget

5. 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

6. 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)

7. 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

8. 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

9. 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

10. 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

11. Variance Analysis
Page 145

12. 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

13. Setting Budgets