Accounting For You

Accounting and Bookkeeping for Small Businesses and Sole Traders

Chartered Management Accountant, Certified Practising Accountant

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Budgeting for Business

Posted on 12 January, 2014 at 16:23
Once you have plans and goals for your business the next most logical thing to put in place is budgets. Budgets can be important tools which unfortunately too many businesses don’t make proper use of.

Too many businesses will take their “actual” sales and costs from the previous year and then use them as their “budgeted” sales and costs for the next year. While this may be a quick and easy way to put a budget together it means that the budget isn’t being used to its full extent – as a control tool.

Budgets can be used when helping to forecast sales, but more importantly they should be used to help control costs.

  • Are all your costs necessary?
  • Are you spending money on things that you don’t really need?
  • Are there ways to reduce some of your costs?
  • Could you achieve better savings by timing your purchases or by buying in bulk?

These are all questions that you should be asking when putting together a budget.

One example that I saw at a previous company was the buying of stationery. All stationery was purchased online and then delivered. The delivery cost was free if the order was over a certain amount. Originally the stationery was purchased as and when required and delivery costs were frequently paid. However, this was changed to a once a month order, with requirements being added to a list throughout the month. This immediately eradicated the delivery costs while at the same time making staff more careful with their stationery usage thus reducing the cost of stationery consumables too.

Zero Based Budgeting is a great way to set up a budget that is to be used as a proper control tool, particularly for new businesses or businesses that need to introduce better control of their costs. What zero based budgeting does, as the name implies, is that it starts with no costs in the budget at all. You then justify every cost that gets added to the budget:

  • Do I need to spend this?
  • What is the best price I can get this for?
  • Is there a way to reduce this?

By asking these questions and justifying every item of expenditure the budget is being used as a control tool making you aware of all your costs and the need for them.

Of course putting a budget together is just half of the exercise when it comes to properly using a budget as a control tool. The other half of the exercise is to compare and analyse the actual costs against the budgeted costs. This will be covered in more depth at a later time.

Categories: budgeting

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