I am still amazed by how many companies do not set an annual budget at the beginning of each financial year. Producing a budget starts with the sales forecast and if you are not great with spreadsheets there are plenty of .co.uk sites where you can download a free generic template. Group your main products into categories and decide how many you expect to sell each month, add the sale price and your buy price for each category and the template will calculate your gross margin. Decide how much of that gross margin you are going to spend on Overheads (salaries, travel costs, marketing etc.) and out of the bottom drops your monthly profit.
If your business requires capital expenditure, put this on a separate sheet and decide the period over which you want to write these assets off (depreciation). At this point you should probably give everything to a management accountant who will ask you questions like how long your customers take to pay you and when you have to pay your bills. If you cannot afford a management accountant yet there are management accounts templates on the web that will also turn your assumptions into a profit and loss, cash flow forecast and balance sheet for your business.
Try and start the budgeting process at least two months ahead of the beginning of your fiscal year. You should circulate your first draft to all interested parties as there are likely to be many changes before a final version is agreed. An alternative is to ask each department to contribute before you build your first version however I find it is quicker to issue the first draft based on my own assumptions. Departments can then challenge them, justifying any proposed changes.
Once your budget is adopted by the Board strongly resist any inclinations to tinker with it. If you are going to tweak the targets each time something unexpected happens the value of your budget is diminished and people lose confidence in it. Most companies will share their top-line performance against budget monthly or quarterly with their staff and it is important to be consistent. However I appreciate that predicting the future is difficult and it is good practice to re-forecast on a quarterly basis, plugging the actuals for the quarter into a model and projecting forward. In this way you will build an expectation of how the company will end the year, without having to meddle with the budget.
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Andrew Dickinson
Managing Director
M 07710936111 T 01799610303 DDI 01799610311
Jola Cloud Solutions Ltd, Cambridge House, 16 High Street, Saffron Walden, Essex CB101AX
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From: Cherie Howlett <cherie.howlett@jola.co.uk>
Date: Wednesday, 21 September 2016 at 10:28
To: Andrew Dickinson <andrew.dickinson@jola.co.uk>
Subject: Re: draft management accounts blog
I don’t think it is long. Blogs are meant to be as long as magazine articles rather than short press releases.
We could do a budgeting blog follow up but it is more important to get this one up now to influence web visitors.
From: Andrew Dickinson <andrew.dickinson@jola.co.uk>
Date: Wednesday, 21 September 2016 at 10:20
To: Cherie Howlett <cherie.howlett@jola.co.uk>
Subject: Re: draft management accounts blog
It’s a little long.
Do you think we could have a separate blog on budgeting as its not strictly speaking part of the management accounts process?
Maybe reference the budgeting blog in the management accounts blog?
Andrew Dickinson
Managing Director
M 07710936111 T 01799610303 DDI 01799610311
Jola Cloud Solutions Ltd, Cambridge House, 16 High Street, Saffron Walden, Essex CB101AX
Registered in England & Wales, Company number: 08992420, VAT number: 188294066
This message is private and confidential. If you have received this message in error, please notify us and remove it from your system.
Any prices quoted in this email are valid for 30 days, for indicative purposes only and are subject to further technical appraisal. Additional installation charges may apply and all orders are subject to survey. Unless otherwise specified, prices are in GB Pounds and exclude VAT (or equivalent taxes). Acceptance of any proposal contained in this email is subject to formal contract.
From: Cherie Howlett <cherie.howlett@jola.co.uk>
Date: Wednesday, 21 September 2016 at 10:07
To: Andrew Dickinson <andrew.dickinson@jola.co.uk>
Subject: Re: draft management accounts blog
Ok with this? http://info.jola.co.uk/blog/management-accounts
From: Andrew Dickinson <andrew.dickinson@jola.co.uk>
Date: Friday, 9 September 2016 at 10:09
To: Antony Dearden <antony.dearden@jola.co.uk>
Cc: Cherie Howlett <cherie.howlett@jola.co.uk>
Subject: draft management accounts blog
The objective of management accounts is to provide timely and key financial information for managers to make short-term decisions.
They are usually produced monthly and cover cashflow, an income statement and a balance sheet. You should also keep an eye on your margins and measure your performance in all areas against a budget.
I am still amazed by how many companies do not set an annual budget at the beginning of each financial year. Producing a budget starts with the sales forecast and if you are not great with spreadsheets there are plenty of .co.uk sites where you can download a free generic template. Group your main products into categories and decide how many you expect to sell each month, add the sale price and your buy price for each category and the template will calculate your gross margin. Decide how much of that gross margin you are going to spend on Overheads (salaries, travel costs, marketing etc) and out the bottom drops your monthly profit. If your business requires capital expenditure, put this on a separate sheet and decide the period over which you want to right these assets off (depreciation). At this point you should probably give everything to a management accountant who will ask you about how long your customers take to pay you and when you have to pay your bills. If you cannot afford a management accountant yet there are management accounts templates on the web that will also turn your assumptions into a profit and loss, cash flow forecast and balance sheet for your business.
Companies are often obsessed by revenue and of course this is a key indicator of progress, however I like to focus on gross margin. The average gross margin you should expect from your business will depend on what industry you are in, the products you are selling and where you sit in the supply chain. A distributor may be happy to operate on a gross margin of 5% whereas a reseller may need 40% to cover the cost of serving their customers and to compensate them for the value they add. I am always thinking about how I can buy better, reduce the cost to serve without affecting quality and the optimum price for each product. Look at the margin analysis by product to see if your mix of products is right and think about what you can do to increase the volume of higher margin products.
The other key focus is of course cash. If your customers take longer on average to pay you than you have to pay your suppliers, then you have a working capital problem. Try and get customers to sign up to direct debit if your business involves regular payments from them. Once you have done all you can to narrow the gap between paying suppliers and receiving money from customers, take your budget to your bank and ask them for an overdraft to help with working capital. You may be asked to sign a personal guarantee and unless you have a large bad debt problem you will probably be happy to do so.
You will mainly be focused on P&L, cashflow and margin but you should also think about your balance sheet. This shows the overall health of your business and is often how external organisations (banks, suppliers, potential customers) judge you. A positive balance sheet means everything you own exceeds the value of what you owe i.e. you are solvent. There is a legal requirement that you ensure your company does not continue to trade whilst insolvent.
