Sigma Accounting:

Sigma Accounting specialises in providing accountancy and business advisory services to owner managed businesses based on the Isle of Man.

For an informal discussion about how we can help you with the accountancy requirements of your business please contact us.

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SIGMA accounting

Sigma Accounting is registered in the Isle of Man (number 023280B)

and is a member of the ICAEW Practice Assurance Scheme.

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Keeping track of your business - Budgets and business planning:

Your business plan is a roadmap for your future development. It describes your business, its objectives, financial forecasts and your market. It can help you secure external finance, measure success and grow the business. However, for internal management purposes, budgeting can be the most effective way to control your cash flow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing, etc. You'll find that money starts to move in many different directions through your organisation - having a budget is vital to ensuring that you stay in control of expenditure.

A budget is a plan to:

• control your finances
• ensure you can continue to fund your current commitments
• enable you to make confident financial decisions and meet your objectives
• ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome that your business wants to achieve.

Benefits of a business budget

There are a number of benefits of drawing up a business budget, including being better able to:

• manage your money effectively
• allocate appropriate resources to projects
• monitor performance
• meet your objectives
• improve decision-making
• identify problems before they occur - such as the need to raise finance or cash flow difficulties
• plan for the future
• increase staff motivation

Creating a budget

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, and should not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Most businesses start preparing a budget around two to three months before the start of a new financial year.

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
• What are the direct costs of sales - i.e. costs of materials, components or subcontractors to make the product or supply the service?
• What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.:

• cost of premises, including rent or mortgage, business rates and service charges
• staff costs - e.g. pay, benefits, National Insurance
• utilities - e.g. heating, lighting, telephone or internet connection
• printing, postage and stationery
• vehicle expenses
• equipment costs
• advertising and promotion
• travel and subsistence expenses
• legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax. The budget should be in place before the start of the financial year. This will enable staff to be aware of their responsibilities for maximising revenue and managing expenditure.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first.

Once you have figures for income and expenditure, you can work out how much money you're making. You can look at your costs and work out ways to reduce them. You should also be able to spot if you are likely to have cash flow problems - giving you time to do something about them.

You should stick to your budget as far as possible, but review and revise it as needed. As the budget year progresses, control might be better exercised by either a rolling budget or periodic re-forecasting.