For an economic agent (a person, a household, an association, a company, a state …) or an entity (an equipment, a service, a unit, a project, a mission, a function .. ..) the budget is a summary of the estimated revenues and expenditures, determined and quantified for a financial year following (generally the year) document.

What is a budget?

A budget is a legal act of estimation and financial authorization by which annual revenues and expenditures are planned and defined.

New small business owners can run their businesses easily and may not see the need for budgeting. However, if you intend to create a future for your business, you need to finance your plans.

Budgeting is this most effective way to control your cash flow, allowing you to invest in new opportunities at the right time, its objective to review up or down if its motivating teams.

This is a financial table that groups together all the expenses (or “fees”) and receipts (or “products”) related to your business project for the current or next year. The year in question is called the “fiscal year”. In general, it corresponds to a fiscal year.

The budget is the roadmap sheet that you will follow throughout the year. Many companies mistakenly ignore this exercise.

If your business is growing, you may not be able to manage every part of it. It may be necessary to outsourced the budget between different areas, such as sales, production, marketing, etc. You will see that money is starting to move in more directions within your organization. Budgets are a vital tool to ensure that you stay in control of spending, adjusting to reach the expected margin.

In case of lack of income or excessive social taxes, you risk a budget deficit.

Notes: you should not confuse the budget and the business plan. The budget is a one-year financial forecast, while the business plan details the market, organization and business strategy for the coming years. Your budget will also be much more detailed in terms of expenses and income than your business plan.

Why set an estimated budget?

A budget is a plan for:

– Controling finances. The estimated budget reflects the financial health of your business. Its objective is to verify the viability, performance and profitability of the project or business.

– Ensure that you can continue to fund your current commitments,

– You will be able to make financial decisions with confidence and achieve your goals,

– Make sure you have enough money for future projects.

It determines how you will spend your money and how these expenses will be financed. However, this is not a forecast. A forecast is a prediction of the future, while a budget is a planned result of the future, defined by your business plan, which your business wants to achieve.

You should check this budget regularly throughout the year, if possible each month. Any change in one of the elements of the table can have a significant impact.

For example, if your supplier decides to increase their shipping cost by 10%, you need to make sure you have enough money to fund that extra expense.

The advantages of a budget

There are many benefits to writing a business budget, including the ability to:

– manage money efficiently,

– allocate adequate resources to projects,

– monitor performance,

– meet the objectives,

– improve decision making,

– identify problems before they arise, such as the need to find money or cash flow difficulties,

– make plans for the future,

– increases staff motivation.

Where does the word « budget » come from?

From the old French “bougette” that in the Middle Ages designated a satchel, the word “budget”, in its current sense, came back in English in the early nineteenth century (not everyone agrees with the date). He pointed to the small leather bag in which the British prime minister took financial documents to inform parliamentarians.

What is a state budget?

Specifically, a budget is the set of elements by which the state or communities, on the one hand, anticipate their revenues and financial needs for the next year and, on the other hand, are legally authorized to implement them.

Officially, the budget materializes:

– for the state, in the laws of initial and rectifying finances adopted by the Parliament;

– for the local authorities, in the initial and additional budgets voted by the deliberative assemblies.

Every year, the finance law authorizes the state to collect taxes on its behalf and on behalf of local communities. Also, based on their budget, the state and the communities are authorized, within the provided budgets, to bear public expenditures. The annual vote on the budget is a major political act, whereby Parliament provides public services with the means to make it work.

From a technical point of view of public finances, the budget is not an accounting document. The accounting aims to track what is executed and is used, once the financial year closes, to compare the achievements with the forecast. While the budget is an a priori act, the accounting is done, by definition, a posteriori.

What is a budget and what is it used for an association?

A budget is a management tool, through which the association forecasts your income and anticipates your expenses. It is proposed by the board of directors and submitted to a vote at the general meeting.

Conventionally, the budget plays a role of financial forecasting, either in the form of revenue-expenditure or cash, for operations and / or investments.

It makes it possible to ensure or not the existence of a balanced budget during the year. It is also an efficient and dynamic control tool, especially with the analysis of the gaps between forecasts and achievements.

However, the budget cannot be limited to this strictly financial role, but must be a real tool for forecasting the activities of the association.

Indeed, the budget must reflect the strategic options and economic objectives of the association.

This is a real work of reflection that must be done to increase the guidelines of the association in financial terms. It cannot consist of a systematic renewal of every budget line.

For real efficiency, the budget should be adopted before the beginning of the financial year in question.

Finally, the budget is a determining factor in obtaining external funding for the association.

4 Key steps in drafting a budget

There are several key steps you need to take to ensure that your budgets and plans are as realistic and useful as possible.

1. Make time for your budget

If you invest your time in creating a detailed and realistic budget, it will be easier for you to manage and, ultimately, more efficient.

2. Use the figures from the previous year, but only as a guide.

Collect historical information about sales and costs, if available; it could give you a good indication of sales and probable costs. But it is also essential to take into account your sales plans, how sales resources will be used and any changes in the competitive environment.

3. Create realistic budgets

Use historical information, your business plan and any changes in operations or budget priorities for overhead and other fixed costs.

It is useful to study the relationship between variable costs (output) and sales and then use sales estimation to forecast variable costs. For example, if the unit cost is reduced by 10% for every 20% of additional sales, what will be the reduction in unit costs if you experience a 33% increase in sales?

Make sure your budgets contain enough information so that you can easily monitor the main operational drivers of your business, such as sales, expenses and working capital. Accounting software can help you manage your accounts.

4. Hire the right people

It is best to ask financially responsible staff to provide you with estimated figures for your budget, for example, sales targets, production costs or the cost of a particular project. If you compare their estimates with yours, you will come up with a more realistic budget. This participation in building the budget will make you more dedicated to meeting your budget.

What exactly are we talking about?

1. Plan expenses

They can be quite many . You will not be able to identify them all. Here is a list to guide you and allow you to be as exhaustive as possible.

Separate fixed costs from variable costs:

– fixed costs remain the same, regardless of your level of activity. Also, these are called structural taxes and must be paid regardless of the activity: rents, salaries and wages, internet subscription, monthly payable software, insurance, loan repayment, leasing, taxes, …

– variable costs depend on the order book: raw materials, packaging, transport, subcontracting, commissions from a sales agent, commissions, litigation, advertisements, travel, etc.

2. Identify your money recipes

It’s about identifying everything that makes money for your business:

– sale of goods;

– providing services;

– stored production (modification of stocks of finished products);

– financial products (in case of stock market investments);

– membership fees or members (for associations);

– subsidies and various aids (for associations and companies).

There are management programs that can help you set your estimated budget. On the other hand, I do not recommend the use of models that can be downloaded from the web: each company and each project has its own specificities, it is complicated to stick to a predefined model.

Note: this budget remains “provisional”. Therefore, it will have to evolve according to the additional elements that you will have available during the year (new consumables to be purchased, change of supplier, additional taxes, market development, launch of a new activity, etc.).

3. Estimate the profitability of your project

Gross margin (or commercial margin) is a key element in budgeting being an important indicator of the performance of your business: it allows you to understand if the company’s activity is profitable.

It is calculated from the selling price of the product / service from which the purchase price is deducted.

From the estimated turnover and the estimation of fixed and variable costs, you can calculate the gross margin (= turnover – variable costs -Opex).

Then, calculate the gross margin rate (TMCV), which is your margin in relation to turnover (CA):

TMCV = Gross Margin / Turnover(CA).

If the gross margin rate increases over time, it is due to the fact that your business strategy works well or that you have an ideal management of expenses.

Conversely, if your gross margin rate drops, it may be a sign that your business model needs to be revised.

This is essential because it allows you to anticipate when you will reach the equilibrium point of your business, ie the total volume of sales you need to reach to cover all fixed costs and expenses:

Break-even point = Fixed costs / Margin rate for recurring costs.

4. Establish a financial projection for 12 months – cash flow

To reach your estimated budget, you need to estimate your cash flow for the next 12 months. Which means thinking about:

– the payment terms to be negotiated with your suppliers,

– the payment conditions of the clients and the payment methods you want to use,

– the frequency of the turnover of your inventory.

5. Adjust the forecasts

Unfortunately, every business faces unpaid bills.

Adjust your budget by adding cash flow estimates from non-performing debt accounting, late payments, and other withdrawals that could affect your business’s revenue and cash flow.

6. Consider seasonal variations

Many companies experience fluctuations in revenue and profit from month to month.

You need to take into account seasonal variations in demand to adjust your budget forecasts: Identify seasonal trends in demand in your market,

Manage resources according to these trends: when possible, allocate enough to cover peak periods.

7. Be rigorous in managing cash

Pay close attention to stock management: make sure you minimize inventory before the business recession.

8. Take into account market trends

Is your industry growing, static or declining?

Use reliable economic data from real experts – ideal in your industry – to calculate the potential for long-term business growth.

To build a successful business, you need to explore current market trends, but also imagine the direction the market will take in the next few years.

9. Arbitrate between different types of expenses

Choose between investment expenses (CAPEX), operating expenses (OPEX), depreciation expenses (should you rent rather than buy, for example?):

CAPEX (“capital expenditures”) is the sum of investment expenditures related to the purchase of professional equipment, ie expenditures that will allow you to remain competitive and bring more added profit in a tense competitive environment.

OPEX (“operational expenses”) corresponds to the operational expenses necessary to run your business, to satisfy your customers and to fulfill your orders.

Depreciation is an accounting term that designates the inclusion, in your financial documents, of the depreciation of your company’s assets. To consider depreciation means to note the loss of value suffered by a fixed asset due to its wear and tear and the passage of time. Therefore, it is indeed a tax, but not an actual payment.

10. Negotiate costs with your suppliers

How much does your business cost to buy or rent the items and services it needs to start and continue to operate?

Request quotes now with your potential / current suppliers to get a firm idea of ​​the total amount your business will have to spend.

11. Discuss the estimated budget with your employees

Design all expenses, operational or exceptional, together with employees, partners or managers, so as to include them or not in the company’s budget.

12. Prioritize your investments

Once all the calculations have been done, it is time to analyze the different investments that need to be made.

This step is also done in cooperation with your employees. Together, it is about defining what the different investment elements will be, their duration and usefulness.

13. Prepare a plan B

What if your business doesn’t work as well as you expected?

Simulate detailed and operational emergency scenarios that you can implement if your business does not meet its objectives.

14. Analyze the budget forecasts

Over time, the needs of the business will increase with its profits.

For optimal use of the estimated budget, make a monthly comparison of forecasts and actual sales. By subtracting the value of your actual transactions from a target set for a certain period, you will get the difference in turnover and costs.

Regularly compare your actual performance with that originally planned in the forecast to stay up to date, control your costs, and adjust your strategy as you progress. Adjust expenses to maximize business growth potential and capitalize on new opportunities.

So that this essential tool for managing your management no longer has any secrets for you, I invite you to consult the resources section!

Questions and answers

How do you recognize a good budget? How to make sure it is a useful indicator without being blocked?

– The appropriate budget will be first of all the budget from which the author will be retained in advance all the components regarding the objectives that have been assigned to him. But a good budget will also be a monitored budget, so a budget for which we offer the necessary means to follow the evolution. In the end, the right budget will be both firm in its objectives and flexible in its application, therefore scalable if necessary.

What good is a budget if, in any case, it will not be kept or will evolve according to the whims of the economy?

– Because the future is more and more uncertain, we must always try to predict it! A budget must certainly evolve and adapt, up or down, depending on cyclical variations, but, except in the event of an accident, it must remain faithful to the objectives on the basis of which it was designed and decided.

What are the budget elements that the young entrepreneur expects? What should they take special care of?

– Wanting to see his project succeed, sometimes he tends to believe too much in himself and to convince himself … At the budgetary level, the consequences are twofold: first of all, he becomes optimistic in appreciating the projections of receipts and deadlines in which will be paid and, on the contrary, underestimates the expenses they will have to make, as well as the related payment terms.