• Financial Planning
  • Budgeting Basics
    • Creating a Budget
    • How to use your budget
  • Cashflow Basics
    • Cashflow Forecasting
    • Managing Cashflow
  • Profit & Loss Basics
    • Records required for producing a profit and loss account
    • Profit and loss accounting periods and tax
  • Balance Sheet Basics
    • Contents of the balance sheet
    • Accounting periods
• Raising Finance
• Bank Articles
• Support Schemes
• Local Finance Support Schemes

How to use your budget

If you base your budget on your business plan, you will be creating a financial action plan. This can be useful, particularly if you review your budgets regularly as part of your annual planning cycle.

Your budget can serve as:

• an indicator of the costs and revenues linked to each of your activities
• a way of providing information and supporting management decisions throughout the year
• a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up-to-date budgets enables you to be flexible and also lets you manage your cashflow and identify what needs to be achieved in the next budgeting period.

There are two main areas to consider when reviewing your budget - income and expenditure.

Your actual income - each month, you should compare your actual income with your sales budget. To do this, you should:

• analyse the reasons for any shortfall - for example, lower sales volumes, flat markets and underperforming products
• consider the reasons for a particularly high turnover - for example, whether your targets were too low
• compare the timing of your income with your projections and check that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure - regularly review your actual expenditure against your budget. This will help you to predict future costs with greater reliability. You should:

• look at how your fixed costs differed from your budget
• check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume
• analyse any reasons for changes in the relationship between costs and turnover
• analyse any differences in the timing of your expenditure - for example, by checking suppliers' payment terms