We have discovered, in the course of our work with micro and small enterprises, that part of the problems limiting small businesses from scaling and being successful is lack of adequate planning and controls. There seems to be not enough awareness of the benefits of budgeting as a tool for both planning and control. Budgeting is recommended for all businesses irrespective of size.
Budget figures can be used as standards against which actual performance is measured - differences are investigated for appropriate actions to be taken.
Cost of Sales Budget
Cost of sales refers to all direct costs of the product sold. These costs include the purchase of products for sale, cost of repackaging if necessary, and carriage from the point of purchase to the warehouse or stores. For manufacturing businesses, these costs include the cost of raw materials, salaries of factory workers, and expenses tied directly to the production plant such as factory cleaning and electricity.
Where it is not easy to estimate the cost of sales per unit, the total cost of sales at the end of a period can be calculated by adding purchases to opening stock and deducting closing stock from the result: Opening Stock + Purchases – Closing Stock.
Gross profit of the business is arrived at by subtracting the cost of sales from sales. It is important to monitor the cost of sales to be sure there are profit and cash for administrative expenses and the business owner.
OVERHEAD BUDGET
Overhead is indirect cost or expenses of managing a business including rent, administrative and marketing costs. Sometimes the cost of labour or salary is not included because of the peculiar nature of labour cost.
Overhead can be fixed and not directly related to the volume of sales, or semi-variable which may fluctuate from month to month based on sales and other factors that influence the volume of sales.
Fixed overhead includes rent, salary, insurance which are fixed for at least one year and are not affected by the quantity of products sold.
Fixed overhead cost budget is usually determined based on advance negotiations or contracts.
Labour costs include statutory obligations to Pension Funds Administrators (PFA), Industrial Training Fund (ITF) and Nigerian Social Insurance Trust Fund (NSITF).
CASH BUDGET
A cash budget for a business is a written plan of expected cash receipts and payments for a specified time period. The cash budget is not about profit or loss but about planning to ensure that cash is available when needed in the business. A business can make a lot of profit and yet be unable to meet its needs for cash which can be very embarrassing.
The cash budget is prepared using information from sales, cost of sales, overhead budgets and other transactions involving cash receipts and payments. For instance, one-off cash from the sale of assets and for purchase of assets will be regarded as cash receipts and payments respectively. The cash budget points to when there will be cash flow shortages in future for necessary actions.
| XYZ CASH BUDGET (NAIRA | ||||
| QUARTER | ||||
| 1 | 2 | 3 | 4 | |
| Cash Sales | 840,000 | 875,000 | 700,000 | 910,000 |
| Loan from friends | 50,000 | |||
| Total Cash Receipts (a) | 840,000 | 925,000 | 700,000 | 910,000 |
| Cost of Sales | 192,000 | 200,000 | 160,000 | 208,000 |
| Rent | 36,000 | |||
| Advertising and promotion | 50,000 | 50,000 | 25,000 | |
| Other admin expenses | 480,100 | 496,500 | 495,500 | 476,100 |
| Total cash payments (b) | 758,100 | 696,500 | 705,500 | 709,100 |
| Cash for the period (a) – (b) | 81,900 | 228,500 | (5,500) | 200,900 |
| Cash brought forward | 81,900 | 310,400 | 304,900 | |
| Cash at the end of the period | 81,900 | 310,400 | 304,900 | 505,800 |
Do you have a cash budget for your small business? If you do not have yet, then prepare to have one beginning from next month.