Budgets are an essential management tool that allows business owners to monitor the financial impact of their business decisions and operational plans. Business results are monitored against the prepared budget so business owners can track whether their business is achieving goals and remaining profitable.
A profit and loss budget is a one page summary of expected income and expenses. It is usually prepared monthly, covers a twelve month period, and is based on a financial year. The budgets are normally prepared in association with an accountant.
The steps for preparing a profit and loss budget are:
- Review the business Strategic Plan to ensure the budget is aligned to the goals.
- Review the prior year’s monthly profit and loss statements and enter the income and expense details in the Profit and Loss Budget Template (specific software program or Excel spreadsheet).
- Revise the monthly figures where necessary to account for changes in activities, volumes and prices.
- Identify and document all assumptions that have been made for the budget period.
Importantly once the Profit and Loss Budget has been prepared regular monitoring of the budget against actual results is essential. This provides information on whether the business is on track to meet the goals detailed in the Strategic Plan. At the end of each month, the actual results from the profit and loss statement must be compared with the budgeted results. Any variances will need to be investigated and action taken. This information helps minimize future variances by enabling the business owner to make changes immediately so that the financial years’ strategic goals can still be achieved.