Creating a cash budget

Planning for a final (commonly called master) budget will be incomplete without a cash budget.  This will show how money will be mvoed to and from the business account to make it possible to finance the company's activities.

BENEFITS

1.  PLANNING TOOL
A cash budget shows the cash effect of all plans made in the budget.  If the cash flow is negative, the company knows it either

• has to put more pressure on debtors or
• seek further sources of finance. 

For instance, disbursements are lumped together, and you need to spread your payments to creditors more evenly throughout the year.  This will lower bank credit and interest costs. 

2.  WARNING SIGNAL

A cash budget may also give management a sign of the potential problems that could emerge and gives them time to take action to avoid such problems.


An example of a cash budget
http://spreadsheets.google.com/pub?key=thlpxQ9A0KkLx27yOw9nvBQ&output=html

Start-up Budget Objectives

For start-ups, it may be useful to try to answer the following set of questions to help you make some reaonable assumptions about your business and its early days of operating and trading:

1. How many products/services do you expect to sell in the first year?
2. Can you predict a rate of sales growth for the next three years?
3. How will you price your products/services?
4. What will be the cost of producing your product/service?
5. What will your operating expenses be?
6. How many employees do you intend to hire and how much will you pay them?
7. Have you established whether your business will be a proprietorship, a partnership, or a corporatin?  The tax consequences of each form will vary considerably.
8. Will you be leasing/renting/buying an office?  What will the costs be?
9. How much finance will you need to raise?  What is the interest rate on funds that you are borrowing?
10. Will you sell on credit?  Have you established what payment terms you will get from suppliers and what you will offer customers?

Monitoring the budget

After a budget has been written and approved, the task of monitoring the budget begins.  Inevitably, actual events will produce results that vary from the budget.  These are recommended steps to monitor the results.

1.  SET A TIME PERIOD
With an annual budget, you will have to wait a couple of months after the end of the yar.  However, most budgets allow for quarterly, if not monthly, observations based on monthly projections.

2.  REGISTER ACTUAL RESULTS
The first step is to write down the results achieved by the company and compare them with projections.  Any discrepancies are typically called variances.  When the variances are over 10 percent, it is worth looking into the reasons.

3.  CATEGORISE VARIANCES
It is easier to assess the variances that concern you by categorizing them into price, volume and timing.

4.  ANALYSE VARIANCES
With each variance, ask what could have led to the miscalculation.  The causes are usuallly budget errors, the result of poor preparation, or changes that result from external factors such as economic change.

5.  TAKE CAUTIOUS ACTION
Sometimes it's better not to take swift action.  Blaming staff for not forecasting an event, when in reality they had a few ways of predicting a result, can damage morale.  Be cautious.  If you can make amends, look at the expense and find out if there are ways of reducing overhead.

6.  REVIEW TARGETS
Some variances may be the result of overly optimistic revenue projections.  Were the sales targets unattainable?  Study performance of competitors and analyze whether targets were realistic.

7.  REVIEW PROCESS
You should review the way the budget was put together.  Were the objectives set by top management in a top-down fashion? Were middle and lower ranking directors encouraged to provide their opinions on the company goals?

Defining budget objectives

Budget are made primarily to help meet objectives. 

As a result, the type of budget you devise will vary considerably depending on the ultimate purpose of the plan.  The following steps will help you define your objectives:

1.  UNDERSTAND YOUR COMPANY
Identify your company's Strength, Weaknesses, Opportunities and Threats ( a particular technique known as SWOT) can help you amass valuable facts that will help you identify necessary action to take:

• STRENGTH:  What advantages does your company have over rivals?
• WEAKNESSES:  Where is the company underperforming and what are competitors doing better and why?
• OPPORTUNITIES:  Where are the biggest chances for growth?
• THREATS:  What are the biggest obstacles facing you:  for example, competition, or shortage of investment capital?

2.  LISTEN TO COMPANY SECTIONS
If you are a small company, it will be easier for you to identify the core strengths, weaknesses, opportunities, and threats but in a larger company, these may vary significantly. 

• You need to gather information from different deparments to ensure their needs are met by the budget. 
• For instance, marketing and advertising may be understaffed, and this could negatively affect overall sales, no matter how much time you've put into improving the core product.

3.  SUMMARIZE CORE AIMS
Summaries of the core objectives of the company and the different departments, or mission statements, could include

• "We are trying to increase revenue."
• "We want to raise market share by xx."
• "We need to focus on cutting costs."
• "We need to research new product lines."

4. SET FINANCIAL TARGETS
Make sure you have taken into account the financial targets of every department, including

• marketing and advertising
• purchasing/inventory
• personnel
• administration
• finance department
• sales
• customer service

TIMING OF A BUDGET

TIMING OF A BUDGET

1. There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years, although the most typical period is one year, to coincide with the company's financial year. This is called a fixed budget.

2. Even an annual budget is typically split into quarterly or monthly statements to make the process more manageable and easier to follow. A fixed bduget that is regularly updated to keep up with rapid changes in the company's particular sector is sometimes called a rolling budget.

3. Some businesses budget on a 1-4 week cycle, but these are most effective when they work within a longer time framework.

4. For a one-year cycle, it is best to set the next budget at least three months before the end of the current budget. For a shorter-term budget (one month, for instance), the process should have started at least by the third week of the current budget.

Why budget?

The key to successful financing of daily operations is to budget.

These are some of the key benefits of a well-planned budget:

1. ANTICIPATE PROBLEMS
2. PERSUADE BACKERS
3. MEASURE RESULTS
4. IDENTIFY PROBLEMS
5. IMPROVE DECISION MAKING
6. MOTIVATE STAFF
7. SAVE TIME
8. CREATE STRATEGY

1.  ANTICIPATE PROBLEMS
The process of budgeting forces you to anticipate and prevent problems.  It demands that you estimte how much capital you are going to need for your daily operations and how you will meet these financial obligations without facing a cash flow crisis.

2.  PERSUADE BACKERS
With a budget that anticipates potential bottlenecks in your operations and delays in cash flows, you will be in a better position to make a case for a loan from your bank or investment fund.

3.  MEASURE RESULTS
A budget or plan helps you keep score:  effectively you are meeting your objectives because you have a concrete list of landmarks or targets against which you can measure results.

4.  IDENTIFY PROBLEMS
Budgets try to create the most ideal scenario for your business to follow, but they can also throw up any potential challenges or obstacles that you might otherwise have ignored in your pursuit of preferred results.

5.  IMPROVE DECISION MAKING
When you lay out a template of what the company can achieve and how much it will cost, you are in a better position to make some tricky decisions such as dropping a favourite project because the figures won't add up or to pursue a strategy that you had written off initially.

6.  MOTIVATE STAFF
A budget helps staff to understand what direction the company is going and the parameters in which it is working.  Workers can follow targets, such as sales figures or number of new customers recruited, and measure how well they are performing.

7.  SAVE TIME
While many managers feel that the research and paperwork involved in preparing a budget can cause unnecessary delays to the core operations of the business, the opposite is in fact true.  Lack of planning will inevitably lead to stalled projects while directors grapple with problems that could have been anticipated at an earlier stage.

8.  CREATE STRATEGY
You may have a clear idea of what the business needs to achieve in the short term, but you may have overlooked how the company and the sector you are working in may change in 12 months' time.  A budget can help develop a picture of the future and force you to implement relevant strategies to cope with any adverse conditions.

What is a budget?

A budget is a tool for converting plans into reality.

It covers the process of

• defining objectives;
• forecasting expectations of sales, profits, and expenses of every sort;
• deciding what actions will best help the company achieve these targets;
• determining how much money will be needed to support these actions; and,
• finally, providing a way to monitor whether the actions chosen are the most appropriate at the current time, or whether they need to be modified in some way.,

FEATURES OF A BUDGET

A budget should include the following components to be effective:

1. Clearly defined objectives, both short- and long-term.
2. Estimates of revenue amounts.
3. An analysis of revenue payments:  how far do they lag behind payment of expenses?
4. Estimates of expense amounts and timing of expense payments.
5. A list of ongoing direct and indirect costs.
6. A cash budget to predict cash flow over time.
7. Procedures to monitor the progress of the budget.

Budgeting for Future Success

Why budget?

Budgeting forces companies to anticpate and prevent problems, create strategy, measure results, motivate staff, and save time.

What is it?

A budget covers the process of :

• defining objectives;
• forecasting expectations of sales, profits, and expenses of every sort;
• deciding what actions will best help the company achieve these targets;
• deciding how much money will be needed to support these actions; and
• finally, providing a way to monitor whether the actions chosen are appropriate or whether they need to be modified.

When should a budget be created?

There are no fixed time periods a budget should cover.  The longest range budgets can cover a period of between three and five years.  A more typical period is one year, to coincide with the company's financial year.

How should a budget be created?

DEFINE OBJECTIVES by

• understanding your company,
• listening to company sections,
• summarizing core aims,
• setting financial targets, and
• defining strart-up objectives.

GATHERING INFORMATION by

• estimating sales and revenue,
• estimating expenditure,
• estimating profits/loss, and
• challenging the figures.

CREATE A CASH BUDGET.  No final (or master) budget can be complete without a cash budget that will

• show how money will be moved to and from the business bank account.

How should a budget be monitored?

SET A TIME PERIOD.  Although some companies operate on an annual budget, most allow for quarterly, if not monthly, observations.

REGISTER ACTUAL RESULTS.  Write down the results achieved by the company and compare them with projections.

CATEGORIZE VARIANCES.  Divide into price, volume, and timing.

ANALYZE VARIANCES.  Ask yourself in each of the categories, what could have led to the miscalculation.

REVIEW PROCESS.  Finally, review the way the budget was put together.  It may be that the objectives were unrealistic or not defined specifically enough.

Budgeting for Future Success

Today's world and workplace are considered a "global village." Telecommunications and air transportation make finance, technology, and labour available to a world economy. Increased knowledge and skills will be required to compete in the changing workplace created by the world economy.

To be prepared for a career in this new world, people will need a variety of skills. The use of budgets is one such necessary skill. Allocating money, solving problems, and making decisions are skills needed to create and use either a personal or business budget. These skills are also critical for people who want to be ready to achieve personal and professional success.

If you learn good budgeting skills and are able to apply them to different situations, people will take notice. At your current job, you can impress your employer by suggesting possible budgeting improvements. If you help your boss now, he or she will help you later. Maybe your boss will write you a good recommendation for a future job. Or perhaps he or she will help you find a good job when you finish the present posting. Whatever the case, using your budgeting skills now can only benefit you in your future career.

You will also find that balancing your current budget, no matter how little money it may involve, will help you balance your personal budget in the future. You will be making more money when you begin your career, but balancing your budget then will involve the same steps that it does now. That way, when you do begin to earn more money - and possibly even have to balance a budget that includes a spouse and children - you will be well prepared to do it.

Success with budgets can be achieved. Many people start with basic personal budgets when learning to budget money. Tracking budget items and adjusting the budget over time gives experience that can be used with more complex budgets. Budgeting your allowance prepares you to budget when you have income from a job, for example. And budgeting part-time earnings prepares you to budget for your own business someday.

A budget may not make you rich. But when used with creativity, budgets can provide a sound basis on which to make decisions that will be easy to live with.

Good budgeting skills will get you noticed in the highly competitive workplace. Questions to ask yourself:

• How can knowledge of budgetting help you in your career?


• Would budgeting help you if you owned your own business?


• Would a budget be useful if you had a family of your own?