Every year end there is anxiety when the Minister of Finance presents the national budget proposal in Parliament for the following or ensuing year. If approved this budget proposal becomes the national budget. Many businesses wait for the national budget presentation before preparing or finalising their own.
This article seeks to give insights into basic annual budgets for businesses. This is simplified to cater for a wide range of readers such as non-finance people including small to medium enterprises who may to note have the resources to hire highly qualified and experienced finance professionals.
Many large businesses have strategic plans giving direction for say 3-5 years or longer. Annual budgets for a specific financial period are expected to speak to the strategic plan. Such budgets typically cover 12 months but can be reviewed regularly such as half yearly or quarterly.
There are different approaches to budgeting. These include zero base approach, incremental budgeting, etc. Zero base budgeting involves starting from zero and justifying every number where incremental budgeting involving budgeting based on actuals for prior periods. In practice you may find a combination of approaches. Some companies embark on budget seminars towards year end. They review many factors such as current year performance, external factors affecting the business, factors that will influence future performance, industry specific and company specific issues.
Some of the specific considerations include continuing businesses, discontinued business lines or products, competition, changes in production capacity, cost of inputs, efficiency levels, utilities, staffing levels, overheads, inflation, exchange rates, interest rates, and many others.
Layout of a business budget
It is common to find the following components in annual budgets of a company:
- Review of preceding year. For example a review of 2019 when preparing the 2020 budgets.
- Current budget year, e.g. 2020, planning assumptions.
- Volume assumptions, for example comparing 2020 and 2019.
- Staffing assumptions for the budget period, e.g. 2020
- Internal pricing assumptions
- Value or dollar projects.
You can typically find the following statements in a company budget:
- Summary of the financial projections, for example 2020 compared to 2019,
- Volumes projections,
- Monthly on monthly income statement or trading projections,
- Capital expenditure budget,
- Cash budget, also called budgeted cashflow statement, not covered here.
Hypothetical examples for illustrative purposes only are given below.
Summary Budgets
You may find a summary of the annual budget as follows, usually in an Executive Summary.
Volume projections
Typical volume projections may be presented as follows. Marketing and Production functions are key in estimating volumes.
Monthly Income Statement Projections
Typical monthly income statement or trading projections can be in this format.
The finance function in a company is instrumental in co-ordinating the above projections
Capital Expenditure Budget
A typical capital expenditure budget may be prepared as shown hereunder.
Budgeted cashflow
Space permitting the management of finance using the tool of cashflow will be presented separately.
Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner. He is a consultant in deal structuring and tax. He writes in his personal capacity and can be contacted on +263 772 246 900 or gohofisi@gmail.com
