Starting a Business No 7 - Financial Strategy - No 1 Budget Forecasting

A budget forecast has several purposes. It can be used, for example, to obtain the following:

• an estimate or preview of the likely profit (loss) from one of your projects, eg a gig;
• an estimate of the yearly profit (loss) from your trading enterprise, eg as a retail outlet.

Thus budgetary control is an important aspect of running your business. Prior to the beginning of given period, eg a year, you  make estimates of items of income flows and expenditure flows within shorter regular periods, eg months. 

For the year the difference between income and expendityure is your profit.

You will need to portray the year as a table of 14 columns. The first column shows the names of  incomes and then expenditures, ie in successive rows. The next 12 columns are for the months with another column showing in successive amounts of the income and costs for  type of income and expenditure. The final column shows totals for each row. The last row at the foot of the table shows the totals for the columns.

A comparison of the sum of the totals of the final column and the sum of the totals of the bottom row should be the same. If not you will need to do some checking! The final correct result is your estimated profit (or loss).

For a shopkeeper the income flow will usually comprise sales (turnover), The expenditure will usually include: a) purchases of stock, b) wages and national insurance, c) heating and lighting; d) rent, and e) local taxes.

Starting a Business No 6 - Objectives and Profit...?

Your Business Plan will set out a) a mission statement and b) some objectives you want to achieve; they are likely to be business objectives and personal objectives.

Fundamental to any financial objectives will be your pricing startegy. How you set your prices for goods or services will be another part of the Business Plan (1 of the 4 x P's). At the end of the day, however, you will want to make an overall profit.

Consider what you want "profit" to represent - against some possible financial objectives. A property valuer's approach to profit suggests that net profit must cover the following  business and personal objectives, ie for a business person who rents or is intending to rent a commercial or industrial or property. (The approach will suffice for our purposes to illustrate the relationships between profit and objectives.) :

1. A business and personal objective will be establishing and maintaining good terms with HMRC by paying your taxes etc! Income taxation is payable on net taxable income which the business makes and which HMRC will take from you and/or your business;
2. A business and personal objective will be interest on capital invested. You will probably invest your own or borrowed money in a) property, b) plant and machinery, vehicles or other equipment,  c) furniture and d) other items. You will need to pay any interest on: a) borrowed capital (money); and (in principle) b) on any money you personally invest (from savings). It is useful to see this as being at a commercial rate of interest.
3. You will need to cover the salary or wages you would have earned as a manager of your business or by being employed by a rival (set it at the going rate). If you don't earn that in due course, you may as well give up your business and work for another;
4. Finally, a personal objective will be to recognise the risk inherent in running your own business. You are taking a risk in running your own business so you will want a portion (%) of the profit as a reward for your risk-taking.

Of course, you will not necessarily expect to achieve all of 1 to 4 in the first year: indeed your business may take several years to become established. Once it is established your might check that the business and personal objectives are being achieved - at least in financial terms!