How to draw up a budget

Checklist

  1. 1 Involve employees who will be responsible for the budget or who have information which will help you prepare forecasts.
  2. 2 Collect historical information on sales and costs.
  3. 3 Consider what your sales plans are, how sales resources will be used and any changes in the competitive environment.
  4. 4 Prepare your sales forecast, taking into account any seasonal variations in activity.
  5. 5 Use historical information, and any changes in operations or prices, to budget for overheads and other fixed costs.
  6. 6 Establish the relationship between variable costs and sales, and use your sales forecast to project variable costs.
  7. 7 Identify any non-operational cashflow, such as taxes and changes in financing.
  8. 8 Use your experience of payment patterns to forecast the timing of all income and expenditure items.
  9. 9 Bring together the figures, using spreadsheet or financial software, in a cashflow budget.
  10. 10 Prepare any other budgets you will find useful, such as those for profit and loss, and the balance sheet.
  11. 11 Ensure your budgets contain enough information to let you monitor the key performance indicators you use to manage the business.
  12. 12 Identify any significant areas of uncertainty, and if necessary prepare separate budgets for different scenarios.
  13. 13 Agree the budget with the individuals who will be responsible, and be prepared to amend it if your assumptions are unrealistic.
  14. 14 Regularly update budgets as actual figures become available and circumstances change.

Cardinal rules

Do:

  • involve relevant employees
  • take account of changes in your business and the business environment
  • budget for all the key indicators you use
  • update budgets as new information becomes available

Don't:

  • impose unrealistic budgets on unwilling employees
  • automatically base budgets on historical performance
  • set the budget in stone