Budgets for your Business – Part 2
Judging by the response to last week’s episode, devising a Budget has been on lots of To-do lists out there for a long time.
Thankfully, Part 1 seems to have helped, so here we are with Part 2!
How do you report on actual figures against Budget, and what do you do if (or when!) those figures vary?
Click below to find out…
Hi and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and to help your business grow.
In last week’s episode, I talked about designing budgets and why that can be really useful in the business.
So in this week’s episode, as promised, I’m going to carry on the theme and talk about why reporting against budgets is so important and what you should be looking out for as you’re going through the process.
So when you’re reporting against budget, the information can come in a couple of different ways.
You can either see the variance, which is the difference between your budgeted figure and the actual figure as a number, or you can see the variance percentage, which is the difference between your budgeted and actual numbers as a percentage, funnily enough.
So, be warned, when you’re looking at this and the first few times you look at percentage variance, the variance percentage can look quite scary.
But when you look at the actual number, it can be relatively small and potentially insignificant. A 20% variance could actually only be £20!
The sales line is very important when you’re reporting, as it’s the biggest driver for many businesses, so you’ll want to make sure you look at this one. You may well need to adjust targets and behaviors or activities across the business, if you’ve missed your targeted budgeted figure for your sales.
If your business has cost of sales, variance in your gross profit percentage is an important one to monitor as well.
Your gross profit percentage is your gross profit as a percentage of your sales and when that number moves, you need to understand what’s caused that change. There are quite a few different potential reasons.
- It could be that, for example, material costs have changed.
- It could be that your suppliers may have changed their prices and those are unlikely to have gone down.
- You could have a particularly productive team member or otherwise.
When you’re reporting against budget, do check with us for input.
It doesn’t have to be anything massive but what we’d like to be able to do is tell you what variances you don’t need to worry about. So, for your business, it could be £100, it could be £500 or £1,000. But then whatever you’ve set that as, you don’t then need to look at those figures that varies by that amount.
Consider overheads as a whole.
You may have individual fluctuations in the different categories, but look at the overall level. Unless you’ve got consistent variances in things like salaries, at which point, you’d need to look at the reasons behind it. It could just be your original budget wasn’t quite on spec. But if there is a big difference, you need to be able to explain it away.
Your profit is the sales less the cost of sales less overheads. It’s simple maths but simple differences in lots of areas can cause a big difference to the profit figure at the bottom. This is especially relevant if profits are low.
Budgets and the resulting reports are essentially a feedback mechanism, which help you understand and predict how the business is going to perform in the future. It’s never going to be an exact science but it helps you understand how the changes that you make will affect the business going forwards.
So, hopefully, that two-part exploration of budgets is helpful. If you’ve got any questions, if I haven’t quite covered one aspect for you in as much detail as you need, then please just do get in touch. Either drop us an email or give us a call and we’ll be more than happy to talk it through and actually relate it back directly to your business and your software and your numbers.
Having even the most basic budget in place can be really, really helpful and it can also be really simple.
So, I’ll leave you with that thought and I’ll see you very soon.