So, you’ve set some goals for your business and are happily recording all your transactions, but what do you do with all this information and how can you use it to help you make decisions in your business?
What is Budget Monitoring?
The term “budget” is basically another word for target or goal, but specifically, it relates to money. For each type of income and expenses in your accounts, you set an amount that you want to bring in as income, or not spend beyond for your expenses.
Then each month you take your budget and compare it to the actual figures, i.e. how much money you made in income and how much you spent on expenses.
Next, you need to look at why those differences happened and what you could do differently to ensure you meet your targets. This may mean reviewing the targets and changing them if they are not realistic. Budgets don’t have to remain fixed, they can be changed to match your business, especially if you know you do better in some months and not so well in others. This is known as seasonal variation.
Let’s look at an example budget for April and how we can use it to help us with our business.
The budget above shows our target and actual figures for sales and expenses and the expected and actual profit for the month of April. It also shows the differences between the budget and the actual figures. You will see in the difference column that some figures are highlighted red. For income, this is because we haven’t made as much as expected and for expenses, this is because we have spent more than budgeted.
Next, we need to look at why these differences have occurred.
Examining the budget – Sales
Let’s start with the overall sales. We set a budget of £1000 but only made £800. What could have caused our sales to be less than expected? Well, for a start Easter is in April, maybe people were thinking more about chocolate eggs than our products. Perhaps next year we need to look at where Easter falls and think about promoting our products differently or lowering our budget to account for the seasonal drop in sales.
However, if we break sales down into our different products, we can see that Products 1, 2 and 4 didn’t perform as well as expected, but Product 3 did better than expected. Let’s look at each of those and think about why one did better than the rest. Did Product 3 get promoted at a different time of day or was it a new product this month? Was there enough inventory of the other products for the month to allow the sales target to be reached, or did we run out of stock of a particular product, therefore leading to fewer sales?
Examining the budget – Expenses
Next, we can look at our expenses. In total, we have spent less than budgeted, which is good, as that increases our overall profits for the month.
However, if we look at our expenses individually we can see that we spent less on materials. If we look into why perhaps the order from our supplier didn’t include everything we ordered as they were out of stock. This may also explain the decrease in sales for a particular product as we didn’t have enough materials in stock to make our own products to supply our customers. It could also be that the supplier had an offer on this month, thus reducing the cost of the materials we bought.
We also spent more on postage and packaging. Perhaps the post office increased their prices and we hadn’t accounted for this. This means we will need to alter the budget in future months to reflect the increase in postage prices. Perhaps we need to review our packaging options to see if there is a more cost-effective option.
How can budget monitoring help me?
The budget monitoring process will help you to see where you can make improvements in your business, perhaps you need to increase your sales prices on products that are doing really well or decrease them on products that are not doing so well. You may need to review your inventory ordering policy to ensure you always have enough to reach your sales targets.
Maybe you need to source a new supplier for your materials to reduce your costs, however, you should keep in mind that cheaper materials may mean the quality isn’t as good. You could also look to see if it’s viable to swap to a more eco-friendly option for packaging or other materials you use in your business.
Keeping an eye on income and expenditure with a budget means you can make changes in your business to keep it profitable, for example, you will be able to see when a product is no longer performing as well and perhaps needs to be replaced with a new product. You will also be able to get an idea of what your customers are buying and market more effectively to this demographic of people.
Overall, creating a budget and comparing it to the actuals will help you predict how much profit you will make over a period of time and allow you to make longer-term decisions about your business.
How can I help you with budget monitoring?
I love budget monitoring and working through the differences and the reasons behind them. Budgets help tell the story of a business, where it’s come from and shows the possible directions it can go in.
If you want to discuss budget monitoring with a specific focus on your business, you can book a 1-hour Help and Advice session with me for £30. I can also help create business specific budget spreadsheets for you for £50.