de Jong and Phillips LLP

Why every business needs a budget

By Pamela Phillips

What is a budget?

A budget is a set of stretching yet realistic financial targets which are linked to your longer term plans for the business.

It will include your profit and loss account and balance sheet and is usually for one year ahead and broken down into monthly targets.

A good budget will also include a cashflow forecast so you can see ahead of time if there is going to be a cash squeeze and make decisions now about how to manage this.

Why does your business need a budget?

The process of building a budget is a good way to sense check your plans. If you want to go from £100k sales now to £1m in 3 years, how many new clients do you need to win each year? What growth rate does that equate to? How many staff will you need to support that level of sales? Is that achievable and what do you need to do to make it happen?

Once you have set your budget you will feel more confident making decisions as they arise as you have clearly mapped out your priorities at the start of the year.

Your budget will act as an early warning system. If financial performance veers away from the budget then you know you need to spend some time working out why this is and what can be done to get things back on track.

What is the difference between a Forecast and a budget?

Often the terms budget and forecast are used interchangeably but they are different things. A budget is a fixed target, set at a point in time whereas a forecast is your best view of the full year results.

At the start of a year the budget and forecast will be in line but as the year rolls on the two will diverge. Keeping a close eye on any divergence will help you identify areas of the business that you need to focus your attention.

Need help with creating a budget?

Well this just happens to be something we are great at. Our next blog will give you some tips on how to create a budget for your business. If you want to find out more in the meantime please do get in touch.

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