Controlling budgets

4 Balance sheet projections While you are working on budgets, calculate the effect of meeting them on your assets and liabilities. 4.1 This will provide you with an internal check on their consistency. 4.2 It will provide you with management information

4 Balance sheet projections

While you are working on budgets, calculate the effect of meeting them on your assets and liabilities.

4.1 This will provide you with an internal check on their consistency.
4.2 It will provide you with management information.
– For example, it will show how much you are likely to be owed by customers at the end of the period, or how much you are likely to owe suppliers and HM Revenue & Customs for VAT and PAYE/NIC. It will provide financial information for prospective backers.
– For example, your bankers will need information on your prospective balance sheet before they decide to lend to you. It will focus your mind on the need for capital spending.

It will show the impact of depreciation on the balance sheet value of new cars, equipment and other fixed assets.

5 Preventive measures

Drawing up a budget enables you to spot problems before they happen.

5.1 Are you in danger of underperforming?
– Does your business need to build up sales as rapidly as possible?
– Will your forecast costs be too high?
– Where is there scope for cutting back?

5.2 Does your cash budget show that you are going to exceed your overdraft limit in any month? How will you improve cashflow?
– Collect sales income faster.
– Delay payments to your suppliers.
– Would this lose you discounts or damage your relationships with them?
– Arrange extra finance.
– Delay new capital expenditure.

5.3 Are you over-trading?
– The higher your sales, the more money you will need to spend on supplies and other costs ? before being paid yourself.
– If the level of sales becomes too high, your business may simply run out of cash.
– There is no point in capturing huge orders, if you run out of cash and go bankrupt.

6 Actual sales

Your budget is only an educated guess about the future. But once you have started trading, comparing your actual monthly sales and costs with the budget will let you know what is really happening. Begin with sales.

6.1 Was turnover lower than budget? Why?
– If prices or volumes were lower, why?
– Are prices or volumes likely to be lower than forecast in future months, too?

6.2 If turnover was higher than budget, why?
– Were sales brought forward from future months?
– Was the increase in sales caused by large one-off orders?

6.3 Were sales of any individual product lines significantly different from forecast levels?
– Is one product becoming outdated?
– Is another product growing more popular?
– Do you need to focus your marketing or production plans on different products?

7 Actual costs
At the end of each month, check how your actual costs compare with the budget forecast.

7.1 Are they higher or lower overall?

7.2 Which fixed costs varied?
Was this a one-off, or will the fixed costs stay at these new levels?
– For example, will you keep on extra staff?

7.3 How should variable costs have differed from budget?
– For example, consider a candle-maker with budgeted sales of 800 candles, using L800 of wax (eg L1 per candle). If actual sales were 1,000 candles, the cost of wax should be L200 more than forecast.

7.4 How did variable costs differ from budget?
– If the candle-maker spent L1,100 on wax for 1,000 candles, the business has spent L100 more on wax than it should have. Looking at it another way, the cost of wax has risen by ten pence per candle to L1.10. Why? Did the price of wax increase, or was more wax wasted in production?

7.5 Are any of the cost changes permanent or do you expect costs to revert to normal?

8 Actual cash

8.1 How does your month-end cash balance compare with your forecast balance?
8.2 What caused any differences?
– Was turnover different from budget?
– Were costs different from budget?
– Was the timing of cashflow different?

For example, did customers delay payment longer than you had budgeted for?

8.3 Change your future cash budget to reflect any timing differences.
– For example, if sales were as expected, but a large customer delayed payment, you must increase the forecast incoming cash for the month in which you now expect to be paid.

8.4 Keep changing your future cash budget to reflect the actual cash balance.
– For example, suppose you have budgeted for an overdraft of L2,000 at the end of September, and L10,000 at the end of October. But at the end of September, the actual overdraft is L2,500. If nothing else has changed in the October budget, you should now budget for an overdraft of L10,500 at the end of October,L500 more than previously budgeted.

Keep up to date
Your budgets should always represent accurate and realistic targets. This way, you will know what to expect.
You will be able to tell what has gone according to plan, and foresee problems and opportunities in time to take action.
If circumstances change, update your budgets ? so that next month you can tell what else is different.

Using budgeting software
Budgeting software makes it easier for you to produce and update the budgets and forecasts you will need to control your business? finances. It also makes budgeting errors less likely, and looks good to important outsiders such as banks.

Such software allows you to:
A) Adjust your budgets quickly
– To ensure your figures are up to date and realistic.
– To test what could happen if some of your forecasted figures turn out to be incorrect.
B) Perform automatic calculations.
– To show how costs are changing in relation to each other (eg labour costs as a percentage of total fixed costs).
– To monitor the profitability of products.
C) Use the automatic links between budgets.
– To see how changes in the sales or cost budgets will affect the cash budget.
– For example, would you run into a cashflow problem if sales were suddenly lower or higher than forecast?
D) Produce fully integrated forecasts of your business? financial performance.
– Budgeting software can draw on budget figures to make the forecasts you need for your profit and loss account, balance sheet and cashflow statement.

Using appropriate accounting software allows firms to more easily adjust their budgets to calculate the effects of any change in circumstances.