Budgets are designed to carry out a number of functions within a business, such as planning, evaluating performance, co-ordinating activities and in larger companies, communicating,motivating and authorising actions. For a business to maintain control it needs
to produce annual budgets that can then be monitored against actual performance.
There are three components to a budget – namely the Profit and Loss, Balance sheet and Cash flow statements.
This page outlines the approach to be taken in preparing the company budgets – simply click on the links below if you wish to skip to a particular section.
Profit And Loss Statement – Sales
This will set out the expected sales for each month of the next year. The sales budget should be based upon expected sales volume and prices. A single sales line can be predicted but it can be prepared using more detail such as by product line or by customer (or a combination of the two). If the business is vat registered, vat exclusive prices should be used.
The key questions are:
- What sales are you confident of achieving?
- Are there firm orders or contracts?
- Are there key customers that the business can rely on?
- Are there seasonal variations to the sales pattern?
- Does the business have the capacity to meet increasing demand?
Once the Sales budget has been agreed, the costs of the business need to ascertained.
Firstly, determine the fixed costs within the business i.e. those which must be paid no matter what sales are made. Examples are:
- Rent, rates and insurance
- Bank charges
- Interest payments on loans
- Electricity, gas and water rates
- Advertising costs
- Wages, Salaries and expenses
- Administration costs such as accountancy
Variable costs i.e. those that will be incurred in line with the volume of sales. Examples are:
- Material costs
- Distribution costs
- Overtime costs
By separating out the fixed and variable costs the business can calculate the break even position for sales. The calculation is:
£Breakeven = £Fixed Costs / (£ Sales – £Variable costs)