Budgets? Cash Flow & Income Statement? Balance Sheets? Help!! – Part One Budgets

So I guess you have heard of most of these reports in business however what they are what they tell you and how they work together is a mystery for most people.

This week we are going to focus on Budgets.budget

A budget is an ‘educated guess’ of your income and expenses throughout a period of time, such as a month a quarter or a financial year.

So why bother doing of these things?  Well do you know if you can afford to buy that new piece of machinery this year? Or what month is it better to buy it in? Or have you spend too much on advertising? This is where a good budget can guide you.

Basically a budget looks a lot like the table below…….now don’t stress out it’s not that hard I promise.

Period 1 (previous period) Period 2 (Budgeted Period)
Income
  -Less Cost of goods sold
 Gross Profit
Expenses
-wages
-general business expenses
-Any other costs associated with doing your business.
Profit
Tax 30%
Net Profit

 

Start with a similar table above and expand the ‘any other costs associated with doing your business’ as you need to.  Then go through your accounting software, excel sheets or even your bank statements for the period 1 and add in basically the total of what you have paid.  If you have made any one off huge purchases such as that new machine, these do not need to be included unless they are under lease or will have ongoing costs associated.

Then you need to have a hard think about is everything going to stay the same? Or did wages go up or the cost of fuel increase as this will affect the budget in period 2.  If you know something is going to be exactly the same such as rent you can just carry that across, where as something like income may be expected to increase by 5% and this is a number you can quantify in period 2. This is then your completed budget.

budget2

But that doesn’t mean that’s the end of it, ready to be filed away.  This document is able to be used throughout the period to see if the income is making its expected target or to see if there has been too much spent on advertising.  It also needs to be reviewed after the end of the period to determine how close things were and if there were any blowouts that need to be budgeted for in the next period.  Can you identify WHY these things happened? Being able to identify the causes of going over, under and the cause of the growth or decline of your business is extremely important; as not only does it help you see where your heading as a business, but it will also help you budget for the following period.

For more help or a specialised spreadsheet with which to create your budget contact Open Bookkeeping.

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