Budgets are plans, planning is good, and furthermore budgets are plans with numbers.
Every organisation needs sound financial management as part its strategy, finances underpin every aspect of this work. Each activity should be planned and costed, resources must be considered. The budget is the document translating action plans into monetary terms.
We have written before about budgeting, who to involve, what to start, what to look for? Now we’re going to be talking about budgeting, adding the numbers to that story. The budget is the 12 month footprint, that normally connects with your three to five year business plan
Our budget, our business story reflects our business objectives in numbers for the following year. Furthermore, the budget needs to be income, and not cost driven. Above all we prepare individual and key budgets, consequently these are consolidated into three master budgets.
- Income and expenditure
- Balance sheet
- Cash budget
The key budgets include
- Direct Costs
- Capital expenditure
The income budget is the most difficult to prepare. The main reason being that this is an area of the business that is largely influenced by factors beyond our control.
Start with estimating your future income, where the money will come from. Consider a theatre company as an example. The income will come from ticket sales, food and drink sales, sponsorship, merchandising, grants and donations.
Income is made up of two elements, how much of it we sell, its selling price. These two elements are not usually independent of each other, For example we may be able to sell more if we adjust our selling price. This relationship between how much we can sell and price needs to be understood in relation to our products and services. We must also be aware of the following areas:
- Market and industry trends
- Competitor action
- Limiting factors
- Company strategy
Customers do not buy goods and services based on what our costs are, we need to be aware of what our customers are prepared to pay. All the other budgets – with the general exception of overheads – will largely flow from the income budget.
Income Budget Example
When it comes to figuring out sales from tickets then think about the sales lego, the building blocks. Firstly, start with your capacity, how much of an audience can fit into your performance space. Secondly, how many of those seats do you reckon you will sell to your target audiences. Lastly what are your planned ticket prices? Multiply and blend these together and you will get a figure for ticket sales.
When we put those building blocks together, think what will influence the numbers. For example, time of the year, days of the week, marketing and pricing affect how bums on seat. Ticket prices are based on your objectives, marketing and pricing strategy.
Food and drink sales will be affected by ticket sales, so these need to be linked together.
Budgeting for costs
The two areas we need look forward at are:
The usual start points are to consider where we will end up in the current financial year, and then use this as a basis to formulate the following year’s budget. In the area of overheads for example we may simply inflate our current years costs by an agreed percentage.
Zero-based budgeting is a technique, which involves us starting our budget form a zero-base each time, rather than basing it on last year’s figures. Each figure has to be justified in its own right. This technique can help reduce ‘budgetary slack’, and takes nothing as read.
Many of our costs will be flow from our income budget. The number of performances, for example tells how many artists we need, set hire, and marketing costs.
First of all, overhead and departmental budgets are prepared for each major area of activity, for example sales and marketing, accounting and administration. Involve those who know and will be responsible for those budgets in figuring out the numbers. Also, budget participation, involvement, ownership and dialogue plays a positive part in good budgeting.
Future income and strategic objectives may mean producing a capital expenditure budget, which is our budgeted expenditure on fixed assets. The budget will be made up of
- Approved capital projects where expenditure is still outstanding
- Estimated expenditure on future capital projects
The budgeting process ends with the preparation of the master budgets. The master budgets consists of :
- Income statement
- Balance sheet
- Cash budget
This show us our budgeted income, costs and profitability. We can the overall impact in financial terms of our future objectives. If the budget doesn’t show us where we need to be, then look at alternative strategies, or revisit the key budgets.
The budgeted balance sheet is finalised after the profit and loss account has been approved. The balance sheet tells us how financially strong we will be. A sound financial position is crucial for our survival and prosperity.
Above all , cash is the lifeblood of our business. Insufficient or poor cash control is the main reason for business or project failure. Your cash budget says what cash and funding requirements will be. We take relevant action in light of what the cash budget reveals.
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