Budgets
Budgets allow you to set targets for your income and your expenditure as well as for the acquisition of assets or liabilities. Reports can then be printed that allow you to compare and evaluate your performance against your estimates.
Many financial advisers strongly advocate the establishment of a sales budget. A sales budget allows you to estimate your income and this allows expenditure allocations for advertising, rent, phone and other overheads to be carefully monitored. Runaway expenses can, of course, cripple a business, but a real concern is that there is often no clear way to distinguish between overheads that will destroy a business and overheads that are leading to break-even operations or a profit. A profit and loss statement will tell you what has occurred. A budget will help you make proactive decisions and put your mind set in "strategy" mode rather than let you react to problems and end up in "defensive" mode.
One of the major difficulties in planning any budget, but especially a sales budget, is that small business seldom has a guaranteed supply of sales, or even a very predictable monthly income. This is why entering a budget will achieve nothing unless the budget is constantly compared and adjusted to take into account changing market conditions. As Allen Hulls and William Yeadon write in Understanding Business Ratios and Finances, a "budget requires a clear strategy, firm objectives, strict monitoring and fast corrective action."
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