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Budgeting For Small Businesses (1)


A budget is simply a plan of how you intend to spend the money you expect to get, in writing, stated in monetary terms for a specific period. It is based on realistic estimates and takes into consideration relevant objectives and actions necessary to achieve them. A budget is not limited to government and its agencies or big companies; it is very relevant to small businesses, families, and individuals.

Budgeting is one of the simple tools for managing a business.  The process of preparing a budget will help you to know areas to work on to grow your business and be profitable. The budget is very useful for controlling your expenses as a simple budget analysis will show where there is over or underspending which will then enable you to take appropriate action to bring expenses in line with budgeted figures.

A budget is not cast in iron and stone. There should be provision for periodical review, preferably not later than quarterly, so that adjustments can be made to the budget based on changing business needs and circumstances.

A company’s budget is made up of several budgets summarized into financial or master budget which consists of a budgeted income statement, statement of financial position and cash flow. 

A small business may wish to start with the following budgets:

Sales

Cost of Sales

Expenses (Overhead)

Cash

Sales Budget

The sales budget is a carefully thought out written plan of expected revenue from product sales for a period. The budget period can be one month, a quarter, or one year. Products may be physical products or services. The sales budget may be called income or revenue budget for organisations that provide services.

For existing businesses, the budget is based on analysis of historical sales information, expected increase in sales to existing customers, potential new customers arising from sales and marketing activities, the current state of the target market, and reasonable assumptions.  A lot of work is required to get the necessary input for the sales budget to make it realistic. You can even get purchase orders or commitment to buy from as many customers as possible.

For a new business, you may not be sure of what sales to expect because there is no past record of sales to start with, but that does not make the preparation of sales budget irrelevant. You can find out the historical sales data of other companies in the same or similar businesses to guide your estimates. You can also get information and knowledge about the business by joining the membership of relevant trade associations and talking to workers and customers in the industry you are about to enter.

Estimates should be made for each product for a multi-product business, and for each sales channel, after which the figures should be added up to make the complete budget.  This will make it easy to identify low-selling products or channels, for analysis so that appropriate action can be taken to boost sales.

When preparing the sales budget for physical products, start with projected quantities and multiply by expected unit selling price to arrive at your budget figures.

XYZ SALES BUDGET

 

QUARTER

YEAR

 

1

2

3

4

TOTAL

Quantity

           2,400

           2,500

           2,000

           2,600

           9,500

Unit Price (N)

350

350

350

350

350

Budgeted Sales (N)

 840,000

 875,000

 700,000

 910,000

 3,325,000

 

 

 

 

 

 

 

 

 

The sales budget is usually the first budget to be prepared because other budgets take a cue from it. For many businesses, selling is the main challenge or the limiting factor. Without sales, there is no income, and without income, there is no business.

If you are in business and you do not have a sales or income budget, then the time to have one is now.

To be continued...

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