PURPOSE OF A BUDGET A budget is a key management tool for planning, monitoring, and controlling the finances of a project or organization.

It estimates the income and expenditures for a set period of time for your project or organization. Your budget can serve a number of important purposes, including: Monitoring the income and expenditures over the course of a year (or a specific project time frame) Helping to determine if adjustments need to be made in programs and goals Forecasting income and expenses for projects, including the timing and the availability of income (such as additional grant funds) Providing a basis for accountability and transparency.

For funders, a budget is also an essential tool and provides an understanding of your work. Funders view budgets to consider the following: How are you planning to use the grant funds? What are the other sources of funds for the work? Does the budget reflect local costs? Do the expenditures correspond to the activities? Does the budget fall within the guidelines of what the funder can support? What percentage of overhead expenses (such as salaries, rent, utilities) is included in the budget?

PREPARING YOUR BUDGET Who should be involved in the process of preparing a budget?

Program and financial staff should work together to formulate a budget since budgets are based on objectives, action plans, and resources. Once a draft is in place, seeking input from your governing body (such as the board of directors or general assembly) is important. This input gives you an opportunity to develop a clear rationale for your budget, helps you identify if any budget items or expenses have been omitted, and draws on the boards expertise. By collaborating with financial staff, program staff, and your board, you can develop a budget that reflects priorities for the entire organization, helping to build unity in your sense of purpose. What key questions need to be addressed? Building on your planning process, you need to consider the following questions in preparation of creating your budget: What resources will be required to achieve your planned goals? Where will the funds come from? How will you raise the funds? How can your organization make use of inkind or donated services? How will you raise the funds? How can your organization make use of inkind or donated services?

What external factors need to be considered? External influences that are not in your control may have an impact on the success of your efforts. Having alternate plans or rethinking your strategies should be a part of your planning. Some external influences that can affect your financial planning include (examples in parenthesis): Government or national policies and legislations (the Poverty Reduction Strategy that may affect the way governments address poverty) Natural disasters or epidemics (drought that affects the people you are working with) Political conditions (elections that may disrupt daily life or cause instability) Global economic forces (changes in global market prices for the commodity that farmers are producing) Local socio-economic factors (increase in price of fuel affecting your mobility) Availability of donor funds and resources(changes in funding priorities of funders)

When should you create your budget? Begin convening financial and program staff several months before the start of your financial (fiscal) year. This should allow enough time for your group to address the questions above and draft a budget that can be reviewed by your governing board. For a budget that involves a new initiative, additional planning time may be required to develop your action plan and to determine if adequate resources can be raised to implement the project. BUDGET COMPONENTS Below are areas to consider when preparing your budget: Income: Funders like to see a diverse source of revenue which shows that sustainability does not rely on one sole source of funding. The income could include product sales, government contracts, foundation grants, and individual contributions. In some cases, organizations may not have an income to report. Expenses: Expenses should be itemized and include unit costs, for example, daily fees or travel for number of participants. Budget Headings: Make sure that the same budget headings or categories are consistent throughout. the organization, for both income and expense items. This will simplify your bookkeeping and help with reporting and financial reviews. Headings may include: staff salaries, rent, utilities, telephones, equipment, insurance, fuel, travel, fees for expert consultants, etc. Currency: Be sure to note what currency and exchange rate you are using when presenting your budget to a funder. Some may require you to convert your currency in to the US dollars or other currency. Notes: Keep notes to record the budgeting process. Notes explain how and why budget calculations are made. Combined with the budget, notes can serve as a clear guide for your organizations spending and decision-making. Budget clarity and notes also mean that as circumstances

change, revisions to a budget can easily be made to reflect changing realities. It also helps in case the activity is audited. Contingency funds: Include a line item that will incorporate fluctuation of costs or unexpected expenses. In-kind (non-monetary) contribution: It is helpful to show the costs or services contributed by your organization (such as salary for the program manager, or labor to construct a facility). Funders see in-kind contributions as evidence of the organization and communitys commitment to the that could lead to sustainability. STEP-BY-STEP: Creating a Budget These are some of the key steps to implement when preparing and monitoring your budget: Identify and plan your activities for the period in question with your staff. Determine what each of your expenses will be, by category. Use previous budgets or invoices as a guide. Assume an increase for cost of living, if comparing expenses from previous year. Estimate what your sources of income will be, including earned income from sales or services, local funds, international funders and governments. Also consider in-kind services or donations, such as supplies or volunteer time. Analyze the difference between your income and expenses. Make adjustments to balance your budget. Determine what expenses need to be reduced and how your may need to consider a different level of service. 1. Develop a plan for the unexpected, such as if funds do not arrive at the anticipated time, if there is a crisis, or if there are price fluctuations. 2. Present your draft budget and cash flow statement to staff, your governing board, or other key groups within your organization for inputs and endorsement. Being transparent about your budget with the key stakeholders helps to legitimize your organization. 3. Make any changes and finalize your income and expenses budgets, as well as the timing of your expenditures and income. 4. Monitor the budget as your project progresses.

Present as accurate a budget as you can. Purposefully underestimating your expenses because you think it will give you a better chance at receiving a grant can hurt your organization. This is especially true if you are unable to complete the activities due to lack of funds. Community members could become frustrated and lose faith in your organizations ability to deliver. Funders see this as a reflection of poor planning and budgeting skills.

Cost estimates should be reasonable and accurate. Inflating (or overestimating) your budget can also create a sense of mistrust with the funder and beneficiaries. Ensure that the budget corresponds with the objectives of the project. When reporting back on your expenses to funders, report on any differences with the proposed budget and the actual expenses. Make sure that what you spend is reasonable and is directly related to the original objectives of the proposal. For example, funders may question why you have spent funds on mobile phones or rent when the activity was to conduct a workshop. This expense may be legitimate, but have documentation and justification ready in case questions are asked. At the end of the grant period, funders may compare your budget to the actual financial statement to ensure financial compliance. PLANNING FOR BUSINESS SUCCESS When you're running a business, it's easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance. Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment. In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit. Converting this into a cohesive process to manage your business' development doesn't have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved. See the page in this guide on what to include in your annual plan. THE BENEFITS The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

a greater ability to make continuous improvements and anticipate problems sound financial information on which to base decisions improved clarity and focus a greater confidence in your decision-making WHAT TO INCLUDE IN YOUR ANNUAL PLAN

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year. Your annual business plan should include:

an outline of changes that you want to make to your business potential changes to your market, customers and competition your objectives and goals for the year your key performance indicators any issues or problems any operational changes information about your management and people your financial performance and forecasts details of investment in the business

Business planning is most effective when it's an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they've happened. A TYPICAL BUSINESS PLANNING CYCLE 1. Review your current performance against last year/current year targets. 2. Work out your opportunities and threats. 3. Analyse your successes and failures during the previous year. 4. Look at your key objectives for the coming year and change or re-establish your longer-term planning. 5. Identify and refine the resource implications of your review and build a budget. 6. Define the new financial year's profit-and-loss and balance-sheet targets. 7. Conclude the plan. 8. Review it regularly - for example, on a monthly basis - by monitoring performance, reviewing progress and achieving objectives. 9. Go back to 1. BUDGETS AND BUSINESS PLANNING

New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time. If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure. A budget is a plan to:

control your finances ensure you can continue to fund your current commitments enable you to make confident financial decisions and meet your objectives ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future - defined by your plan that your business wants to achieve. BENEFITS OF A BUSINESS BUDGET There are a number of benefits of drawing up a business budget, including being better able to:

manage your money effectively allocate appropriate resources to projects monitor performance meet your objectives improve decision-making identify problems before they occur - such as the need to raise finance or cash flow difficulties plan for the future increase staff motivation CREATING A BUDGET

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It

need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period. Begin by asking these questions:

What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future. What are the direct costs of sales i.e. costs of materials, components or subcontractors to make the product or supply the service? What are the fixed costs or overheads? You should break down the fixed costs and overheads by type, e.g.:

cost of premises, including rent, municipal taxes and service charges staff costs e.g. wages, benefits, Qubec Parental Insurance Plan (QPIP) premiums, contributions to the Qubec Pension Plan (QPP) and to the financing of the Commission des normes du travail (CNT) utilities e.g. heating, lighting, telephone printing, postage and stationery vehicle expenses equipment costs advertising and promotion travel and subsistence expenses legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide up the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax. Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success. Once you've got figures for income and expenditure, you can work out how much money you're making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you've made a budget, you should stick to it as far as possible, but review and revise it as needed. Successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance. KEY STEPS IN DRAWING UP A BUDGET There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible. Make time for budgeting If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective. Use last year's figures - but only as a guide Collect historical information on sales and costs if they are available - these could give you a good indication of likely sales and costs. But it's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment. Create realistic budgets Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs. It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit costs decrease if you have a 33 per cent rise in sales? Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts. Involve the right people It's best to ask staff with financial responsibilities to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget. WHAT YOUR BUDGET SHOULD COVER Decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

WHAT YOUR BUDGET WILL NEED TO INCLUDE Projected cash flow -your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly. Costs - typically, your business will have three kinds of costs:

fixed costs - items such as rent, salaries and financing costs variable costs - including raw materials and overtime one-off capital costs - purchases of computer equipment or premises, for example To forecast your costs, it can help to look at last year's records and contact your suppliers for

quotes. Revenues - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be. Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment. USE YOUR BUDGET TO MEASURE PERFORMANCE If you base your budget on your business plan, you will be creating a financial action plan. This can serve several useful functions, 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 Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance. You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business.

Key performance indicators To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully. The three key drivers for most businesses are:

sales costs working capital

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis. REVIEW YOUR BUDGET REGULARLY 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 cash flow and identify what needs to be achieved in the next budgeting period. Two main areas to consider Your actual income - each month compare your actual income with your sales budget, by:

analysing the reasons for any shortfall - for example lower sales volumes, flat markets, underperforming products considering the reasons for a particularly high turnover - for example whether your targets were too low comparing the timing of your income with your projections and checking 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 better 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

Why Budgeting Is Important Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in or, conversely, not spending enough money to grow the business and compete. Budgeting Techniques Every business owner tends to have a slightly different process, situation, or way of budgeting. However, there are some parameters found in nearly every budget that you can easily employ. For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, cost of goods sold expenses (raw materials), interest and tax payments. The point is that every business owner should consider these items and any other costs specifically associated with his or her business when setting up shop or when taking over an existing business. What To Do with Revenue With a business that is already up and running, you can make assumptions of future revenue based on recent trends in the business. If the business is a startup, you'll have to make assumptions based on your geographic area, hours of operation and by researching other local businesses. Small business owners can often get a sense of what to expect by visiting other local businesses that are for sale and asking questions about weekly revenue and traffic patterns. After you've researched this information, you should then match the business's revenue with expenses. The goal is to figure out what an average weekly expense for overhead, utilities, labor, raw materials, etc. would look like. Based on this information, business owners may then be able to estimate or forecast whether they'll have enough extra money to expand their business, or to tuck away some money into savings. On the flip side, owners may realize that in order to have three employees instead of two, the business will have to generate more in revenue each week. Let's look at six tips that will help you plan your small business budgets. Tip No.1: Check Industry Standards Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the local library for information about the industry, speak with local business owners, and check the IRS website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings. Small businesses can be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors, so you only need to look for an average here, not specifics.

Tip No.2: Make a Spreadsheet Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc. Tip No.3: Factor In Some Slack Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money socked away or coming in before expanding the business or taking on new employees. Tip No.4: Look To Cut Costs If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting. Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide the business owner with much needed breathing and expansion room. Tip No.5: Review the Business Periodically While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions. Tip No.6: Shop Around for Services/Suppliers Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews. Bottom Line Budgeting is an easy but essential process that business owners use to forecast (and then match) current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and The annual business plan and budget process is a key part of running a business successfully and achieving a strategy. It provides a discipline for the management to thoroughly review progress and to set objectives - and for the directors/holding company to commit to supporting the budget and investment plans. Preparing a business plan A business plan is necessary for three primary reasons: It gives business owners a current assessment of the business as well as a roadmap for the future.

It helps a business grow, both organically and through outside funding. It is essential to have an up to date business plan in order to secure financing, ranging from an overdraft facility or bank loan to venture capital funding.

The business plan/budget is a living document that should be continuously reviewed in light of the business environment and actual performance. In addition there should be formal reviews on a quarterly basis. This enables the directors to oversee business performance. Business planning should operate on a rolling five years, while the budget is likely to be required only for the coming financial year. When to use outside help For a business plan to be effective it should be owned by those who will have to implement it. So, it cannot just be delegated to a consultant. But an experienced business facilitator can add value to the process, whilst ensuring that ownership is in-house. He can: guide managers/directors through the process draw out strategies from the participants capture the information record it in a structured manner.

The words of the business plan are important; they explore issues and make commitments to action. A facilitator can ensure that they are carefully chosen and understood. The figures in the budget merely represent an interpretation of the results of those actions. But the spreadsheets that lead to the figures will identify the consequences of decisions - the process is iterative until a plan and budget are reached that can be approved by the directors. Objectives The objectives of the business plan are first to develop and communicate a plan of action that will achieve the company's strategic objective. Then to provide a means of monitoring progress towards that objective and of stimulating alternative action if the objective is unlikely to be met by the original plan. These cannot be achieved unless the plan defines the strategic objective and includes benchmarks or performance measures at key stages during the year. The plan should include reviews of internal resources and the external environment, and define measures of quality and customer satisfaction. The plan is likely to focus on: revenue - income, direct costs and overheads

capital - expenditure, depreciation

Financial measures will include return on investment and margin. Targets for growth may well include turnover - but in this case margin must also be monitored. Don't allow a focus on the figures to confuse the significance of the words. It is only actions described by the words that generate revenue. The planning process The planning process is a valuable and exciting exercise that can be a major contributor to team building and a means of developing ownership/commitment to the plan. Involve people, it should end up as "our plan" not "their plan imposed on us". There are various exercises that can be helpful in the planning process: Analysis of current year financial results SWOT analysis - strengths, weaknesses, opportunities and threats PESTLE analysis - political, economic, social and technological, with legislative/regulatory and environmental Balanced scorecard - analysis of the impact of achieving objectives from a financial perspective, a customer perspective and an internal perspective, and on innovation and learning, together with identification of critical success factors and performance measures. Brainstorming - for alternative scenarios, opportunities, strategies

If the company provides different services or operates in different niche markets these exercises should be checked for each. For a business plan/budget exercise you should focus on: Review of current year as a basis for making decisions about the future Objectives and strategy Action plan and benchmarks Resources needed Results anticipated Outline of a business plan A business plan is a tool for decision making - remember this and remember who it is written for - then design it to suit. A basic business plan has several key elements:

Executive summary Description of the business Description of the target market Analysis of the competition Description of the management team Marketing strategy As a guide, a typical business plan would have the following structure: -

Name of the business Address of the business Nature of the business People in the business Marketing and sales strategy Profit and loss forecasts Cash flow forecasts Capital expenditure plans Stock policy Funds required - financial base Management information systems Special factors Action plan - key decisions - target dates Update Your Budget Monthly

If your budget is going to work for you, plan on revisiting it on a monthly basis with your management team and update it based on your business performance and expenses for the prior month. Take a look at your sales forecast hows your pipeline looking? Are there any indicators that you need to make changes to your budget to cover additional inventory or staffing needs? Look at your expenses are they as projected, or do you need to cut back in certain areas to ensure you stay on track? Make Changes That Can Have a Positive Impact Based on your monthly review, make changes to your budget and then wait to see what impact these have to your income and profits by month and by year. For example,

perhaps you are under-investing in marketing adjust your budget and see what happens to your pipeline next month or over a six-month period. In your next review cycle, look to see if you are a getting good return on marketing dollars spent per sales lead. Then use this information to inform future planning decisions about where best to allocate your costs. What about receivables? Are there ways you can speed up your invoicing and payment cycles to keep cash flowing into the business? Respond to Unexpected Changes Use your budget to help you adjust to the unexpected. Say, for example, an important client cuts their own budget and reduces the amount of business they do with you. Take a look at your budget and how this reduction in revenue affects your cash flow and for how long - meaning how long will it take to find a new client to replace that important revenue source and what will it cost you in terms of marketing or hiring costs to help you uncover new business? Tie Incentives to Budget Performance A great way to get everyone on-board with the idea of focusing and interacting regularly with your budget is to tie performance bonuses to it. So, at the beginning of the year when you plan your annual budget, set parameters for performance tied to profit, but also other categories such as return on investment in marketing dollars, keeping expenses at or lower than plan and so on.