8. Why Budget?

Budgeting is a reality check on your plans and ambitions. It allows you to convert your strategy into a financial plan creating a road map to financial success. Not budgeting sets your organization up to several potential financial problems down the road including restricting possible growth.

Budgeting enables your strategic planning process by reviewing its affordability. During planning, you will be able to determine the potential profitability and resource requirements of your strategy. Your budget will help in decision making including the affordability of hiring new staff, purchasing new plant and equipment, or the affordability of salary increases. It will help you plan to meet financial obligations such as financial repayments, payroll, rent, etc. It can be used to determine your financing requirements and even help attract new investors or help raise finance. It can even help in tax planning.

A budget will help you in setting goals and targets. This will provide you with a benchmark against which you can track performance.

So how do you go about setting a budget?

1. Start with determining your sources of income. What are your different sources of income? Do you expect these to continue? What growth do you forecast? What additional sources of income do you plan to attract in the coming year?

2. Determine your fixed expenses. What expenses will happen no matter what happens to your sales? These would include finance charges, leases, rentals, payroll, etc.

3. Determine your variable expenses. Variable expenses consist of all those costs that are not fixed. Some of these will be directly linked to your sales such as the cost of goods sold or produced. Some might be project or activity-based, for example, a new marketing campaign, training, or travel expenses to a conference. Be aware of the impacts of cutting any of these will have on your overall organization!

4. Determine any once-off expenses. These generally consist of capital costs such as buying a new production plant or any balloon payment on a lease.

5. Put it all together in a typical income statement, balance sheet, and cash flow format. Calculate those missing items such as interest and taxes.

6. Review the above and ask yourself are there any other cash-flow considerations that you need to be aware of. For example, cash flow deficits, impacts of bulk buying or a change in credit policy.

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