Operational budgeting and profit planning ,standard costs and performance reports

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Table of contents
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executive summary .3 introduction .3

an operating budget .6 benefits of a business budget.7 make time for budgeting.8 what your budget will need to include.9 a feasibility study .10 conclusion .13

my recommendation.1 references.1!

Executive summary
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"hen you#re running a business$ it#s easy to get bogged down in day%to%day problems and forget the bigger picture. &owe'er$ successful businesses in'est time to create and manage budgets$ prepare and re'iew business plans and regularly monitor finance and performance. (tructured planning can make all the difference to the growth of your business. )t will enable you to concentrate resources on impro'ing profits$ reducing costs and increasing returns on in'estment. )n fact$ e'en without a formal process$ many businesses carry out the ma*ority of the acti'ities associated with business planning$ such as thinking about growth areas$ competitors$ cash flow and profit. +on'erting this into a cohesi'e process to manage your business# de'elopment doesn#t ha'e to be difficult or time%consuming. ,he most important thing is that plans are made$ they are dynamic and are communicated to e'eryone in'ol'ed. (ee the page in this guide on what to include in your annual plan.1

INTRODUCTION

-n operating budget is the annual budget of an acti'ity stated in terms of .udget +lassification +ode$ functional/sub functional categories and cost accounts. )t contains estimates of the total 'alue of resources re0uired for the performance of the operation including reimbursable work or ser'ices for others. )t also includes estimates of workload in terms of total work units identified by cost accounts. )n the 1nited (tates$ businesses along with state and local go'ernments di'ide their budgets into two types2 the operating budget and capital budget. ,he operating budget is used to keep track of maintenance operations$ salaries$ and interest payments.3 An operating budget
/http://www.infoentrepreneurs.org/en/guides/budgeting-and-business-planning
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http://en.wikipedia.org/wiki/ perating!budget

A detailed projection of all estimated income and expenses based on forecasted sales revenue during a given period (usually one year). It generally consists of several sub-budgets, the most important one being the sales budget, which is prepared first. ince an operating budget is a short-term budget, capital outlays are excluded because they are longterm costs.! - ,45)+-6 .1()78(( 56-77)79 +4+68 1. :e'iew your current performance against last year/current year targets. 3. "ork out your opportunities and threats. 3. -nalyse your successes and failures during the pre'ious year. . 6ook at your key ob*ecti'es for the coming year and change or re%establish your longer%term planning. !. )dentify and refine the resource implications of your re'iew and build a budget. 6. ;efine the new financial year#s profit%and%loss and balance%sheet targets. 7. +onclude the plan. 8. :e'iew it regularly % for e<ample$ on a monthly basis % by monitoring performance$ re'iewing progress and achie'ing ob*ecti'es. 9. 9o back to 1. .1;98,( -7; .1()78(( 56-77)79 7ew small business owners may run their businesses in a rela<ed way and may not see the need to budget. &owe'er$ if you are planning for your business# future$ you will need to fund your plans. .udgeting is the most effecti'e way to control your cashflow$ allowing you to in'est in new opportunities at the appropriate time. )f your business is growing$ you may not always be able to be hands%on with e'ery part of it. 4ou may ha'e to split your budget up between different areas such as sales$ production$ marketing etc. 4ou#ll find that money starts to mo'e in many different directions through your organisation % budgets are a 'ital tool in ensuring that you stay in control of e<penditure. - budget is a plan to2

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control your finances ensure you can continue to fund your current commitments enable you to make confident financial decisions and meet your ob*ecti'es ensure you ha'e enough money for your future pro*ects
http://www.businessdictionary.com/definition/operating-budget.html#ixzz2t5VY !pf

)t outlines what you will spend your money on and how that spending will be financed. &owe'er$ it is not a forecast. - forecast is a prediction of the future whereas a budget is a planned outcome of the future % defined by your plan that your business wants to achie'e. .878=),( >= - .1()78(( .1;98, ,here are a number of benefits of drawing up a business budget$ including being better able to2

manage your money effecti'ely allocate appropriate resources to pro*ects monitor performance meet your ob*ecti'es impro'e decision%making identify problems before they occur % such as the need to raise finance or cash flow difficulties plan for the future increase staff moti'ation +:8-,)79 - .1;98, +reating$ monitoring and managing a budget is key to business success. )t should help you allocate resources where they are needed$ so that your business remains profitable and successful. )t need not be complicated. 4ou simply need to work out what you are likely to earn and spend in the budget period. .egin by asking these 0uestions2

"hat are the projected sales for the budget period? .e realistic % if you o'erestimate$ it will cause you problems in the future. "hat are the direct costs of sales @ i.e. costs of materials$ components or subcontractors to make the product or supply the ser'ice? "hat are the fixed costs or o'erheads? 4ou should break down the fixed costs and o er!eads by type$ e.g.2 cost of premises$ including rent$ municipal ta<es and ser'ice charges staff costs @e.g. wages$ benefits$ AuBbec 5arental )nsurance 5lan CA5)5D premiums$ contributions to the AuBbec 5ension 5lan CA55D and to the financing of the +ommission des normes du tra'ail C+7,D utilities @ e.g. heating$ lighting$ telephone printing$ postage and stationery 'ehicle e<penses e0uipment costs ad'ertising and promotion
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tra'el and subsistence e<penses legal and professional costs$ including insurance 4our business may ha'e different types of e<penses$ and you may need to di'ide up the budget by department. ;on#t forget to add in how much you need to pay yourself$ and include an allowance for ta<. 4our business plan should help in establishing pro*ected sales$ cost of sales$ fi<ed costs and o'erheads$ so it would be worthwhile preparing this first. (ee the page in this guide on planning for business success. >nce you#'e got figures for income and e<penditure$ you can work out how much money you#re making. 4ou can look at costs and work out ways to reduce them. 4ou can see if you are likely to ha'e cash flow problems$ gi'ing yourself time to do something about them. "hen you#'e made a budget$ you should stick to it as far as possible$ but re'iew and re'ise it as needed. (uccessful businesses often ha'e a rolling budget$ so that they are continually budgeting$ e.g. for a year in ad'ance. E84 (,85( )7 ;:-")79 15 - .1;98, ,here are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible. Fake time for budgeting )f you in'est some time in creating a comprehensi'e and realistic budget$ it will be easier to manage and ultimately more effecti'e. 1se last year#s figures % but only as a guide +ollect historical information on sales and costs if they are a'ailable % these could gi'e you a good indication of likely sales and costs. .ut it#s also essential to consider what your sales plans are$ how your sales resources will be used and any changes in the competiti'e en'ironment. +reate realistic budgets 1se historical information$ your business plan and any changes in operations or priorities to budget for o'erheads and other fi<ed costs. )t#s useful to work out the relationship between 'ariable costs and sales and then use your sales forecast to pro*ect 'ariable costs. =or e<ample$ if your unit costs
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reduce by 10 per cent for each additional 30 per cent of sales$ how much will your unit costs decrease if you ha'e a 33 per cent rise in sales? Fake sure your budgets contain enough information for you to easily monitor the key dri'ers of your business such as sales$ costs and working capital. -ccounting software can help you manage your accounts. )n'ol'e the right people )t#s best to ask staff with financial responsibilities to pro'ide you with estimates of figures for your budget % for e<ample$ sales targets$ production costs or specific pro*ect control. )f you balance their estimates against your own$ you will achie'e a more realistic budget. ,his in'ol'ement will also gi'e them greater commitment to meeting the budget. "&-, 4>1: .1;98, (&>16; +>G8: ;ecide how many budgets you really need. Fany small businesses ha'e one o'erall operating budget which sets out how much money is needed to run the business o'er the coming period % usually a year. -s your business grows$ your total operating budget is likely to be made up of se'eral indi'idual budgets such as your marketing or sales budgets. "&-, 4>1: .1;98, ")66 788; ,> )7+61;8 "rojected cas! flo# %your cash budget pro*ects your future cash position on a month%by%month basis. .udgeting in this way is 'ital for small businesses as it can pinpoint any difficulties you might be ha'ing. )t should be re'iewed at least monthly. Costs % typically$ your business will ha'e three kinds of costs2 fi<ed costs % items such as rent$ salaries and financing costs 'ariable costs % including raw materials and o'ertime one%off capital costs % purchases of computer e0uipment or premises$ for e<ample ,o forecast your costs$ it can help to look at last year#s records and contact your suppliers for 0uotes. Re enues % sales or re'enue forecasts are typically based on a combination of your sales history and how effecti'e you e<pect your future efforts to be. 1sing your sales and e<penditure forecasts$ you can prepare pro*ected profits for the ne<t 13 months. ,his will enable you to analyse your margins and other key ratios such as your return on in'estment.
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1(8 4>1: .1;98, ,> F8-(1:8 58:=>:F-7+8 )f you base your budget on your business plan$ you will be creating a financial action plan. ,his can ser'e se'eral useful functions$ particularly if you re'iew your budgets regularly as part of your annual planning cycle. 4our budget can ser'e as2

an indicator of the costs and re'enues linked to each of your acti'ities a way of pro'iding information and supporting management decisions throughout the year a means of monitoring and controlling your business$ particularly if you analyse the differences between your actual and budgeted income .enchmarking performance +omparing your budget year on year can be an e<cellent way of benchmarking your business# performance % you can compare your pro*ected figures$ for e<ample$ with pre'ious years to measure your performance. 4ou can also compare your figures for pro*ected margins and growth with those of other companies in the same sector$ or across different parts of your business. Eey performance indicators ,o boost your business# performance you need to understand and monitor the key Hdri'ersH of your business % a dri'er is something that has a ma*or impact on your business. ,here are many factors affecting e'ery business# performance$ so it is 'ital to focus on a handful of these and monitor them carefully. ,he three key dri'ers for most businesses are2

sales costs working capital -ny trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. ,hey can help you spot problems early on if they are calculated on a consistent basis. :8G)8" 4>1: .1;98, :8916-:64 ,o use your budgets effecti'ely$ you will need to re'iew and re'ise them fre0uently. ,his is particularly true if your business is growing and you are planning to mo'e into new areas.
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1sing up to date budgets enables you to be fle<ible and also lets you manage your cash flow and identify what needs to be achie'ed in the ne<t budgeting period. ,wo main areas to consider $our actual income % each month compare your actual income with your sales budget$ by2 analysing the reasons for any shortfall % for e<ample lower sales 'olumes$ flat markets$ underperforming products considering the reasons for a particularly high turno'er % for e<ample whether your targets were too low comparing the timing of your income with your pro*ections and checking that they fit -nalysing these 'ariations will help you to set future budgets more accurately and also allow you to take action where needed. $our actual expenditure % regularly re'iew your actual e<penditure against your budget. ,his will help you to predict future costs with better reliability. 4ou should2 look at how your fi<ed costs differed from your budget check that your 'ariable costs were in line with your budget % normally 'ariable costs ad*ust in line with your sales 'olume analyse any reasons for changes in the relationship between costs and turno'er analyse any differences in the timing of your e<penditure$ for e<ample by checking suppliers# payment terms >riginal document$ Budgeting and business planning$ I +rown copyright 3009 (ource2 .usiness 6ink 1E Cnow 9>G.1E/.usinessD -dapted for AuBbec by )nfo entrepreneurs >ur information is pro'ided free of charge and is intended to be helpful to a large range of 1E%based Cgo'.uk/businessD and AuBbec%based Cinfoentrepreneurs.orgD businesses. .ecause of its general nature the information cannot be taken as comprehensi'e and should ne'er be used as a substitute for legal or professional ad'ice. "e cannot guarantee that the information applies to the indi'idual circumstances of your business. ;espite our best efforts it is possible that some information may be out of date.pJ -s a result2

,he websites operators cannot take any responsibility for the conse0uences of errors or omissions.liJ
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4ou should always follow the links to more detailed information from the rele'ant go'ernment department or agency. -ny reliance you place on our information or linked to on other websites will be at your own risk. 4ou should consider seeking the ad'ice of independent ad'isors$ and should always check your decisions against your normal business methods and best practice in your field of business. ,he websites operators$ their agents and employees$ are not liable for any losses or damages arising from your use of our websites$ other than in respect of death or personal in*ury caused by their negligence or in respect of fraud.

A feasibilit% stud% - feasibilit% stud% is an e'aluation and analysis of the potential of the proposed pro*ect which is based on e<tensi'e in'estigation and research to gi'e full comfort to the decisions makers =easibility studies aim to ob*ecti'ely and rationally unco'er the strengths and weaknesses of an e<isting business or proposed 'enture$ opportunities and threats as presented by the en'ironment$ the resources re0uired to carry through$ and ultimately the prospects for success. )n its simplest terms$ the two criteria to *udge feasibility are cost re0uired and 'alue to be attained. -s such$ a well%designed feasibility study should pro'ide a historical background of the business or pro*ect$ description of the product or ser'ice$ accounting statements$ details of the operations and management$ marketing research and policies.

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"ash #udget
MANUFACTURE CO has the following collection pattern2 )n the month of sale2 )n the month following sale2 1ncollectible2 !0K 37K 3K

)n the second month following sale2 30K

"ash #udget MANUF ACTURE C O

.udgeted charge sales are as follows2 L-7 =8. F-:+& -5:)6 300$000 3!0$000 36 $000 360$000

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"ash #udget
.udgeted +ash :eceipts for the Fonth 8nding F-:+& 31$ 3013 -ugust sales2 ;& 36 $000 & !0K ;&133$000 Luly sales2 ;& 3!0$000 & 37K 67$!00 Lune sales2 ;& 300$000 & 30K 0$000 ,otal ;& 339$!00

"ash #udget
+ash .udget for the Fonth 8nding F-:+& 31$ 3013 .udgeted receipts .udgeted disbursements 7et increase in cash ;& 339$!00 68$380 ;& 171$130

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#udgeted $ tatement of %ncome

MANUFACTURE CO .udgeted )ncome (tatement for the Fonth ending -ugust 31$ 301 (ales ;& 19 !$000 6ess cost of sales Gross margin >ther e<penses 78, income 7!0$ 00 DH 119!$000 86!000 ;& 330000

Conclusion
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,he key benefit of business planning is that it allows you to create a focus for the direction of your business and pro'ides targets that will help your business grow. )t will also gi'e you the opportunity to stand back and re'iew your performance and the factors affecting your business. .usiness planning can gi'e you2

a greater ability to make continuous impro'ements and anticipate problems sound financial information on which to base decisions impro'ed clarity and focus a greater confidence in your decision%making for e<ample - feasibility study e'aluates the pro*ect#s potential for successM therefore$ the percei'ed ob*ecti'ity is an important factor in the credibility to be placed on the study by potential in'estors and lending institutions )t must therefore be conducted with an ob*ecti'e$ unbiased approach to pro'ide information upon which decisions can be based

m% recommendation ,he main aim of your annual business plan is to set out the strategy and action plan for your business. ,his should include a clear financial picture of where you stand % and e<pect to stand % o'er the coming year. 4our annual business plan should include2

an outline of changes that you want to make to your business potential changes to your market$ customers and competition your ob*ecti'es and goals for the year your key performance indicators any issues or problems any operational changes information about your management and people your financial performance and forecasts details of in'estment in the business .usiness planning is most effecti'e when it#s an ongoing process. ,his allows you to act 0uickly where necessary$ rather than simply reacting to e'ents after they#'e happened.
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References

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3%http2//www.businessdictionary.com/definition/operating%budget.html %http2//www.cliffsnotes.com/more%sub*ects/accounting/accounting%principles% ii/budgets/operating%budgets !%http2//classes.bus.oregonstate.edu/spring%07/ba 33/FanagementK30-ccounting K30+hapterK3030.htm

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