A business master budget is an estimate of your business' financial position in the future. It's a written plan projecting income, as well as expenses, in multiple categories. Planning your financial affairs helps you to be successful in the future. Budgeting can also help you see potential problems that may occur. Master budgets are made up of three main components: revenues; costs; and profit. Each of these is broken down into smaller parts, to give a more detailed view of the financial projections of the business.
Set an operating profit goal. Stephen Covey, in "The Seven Habits of Highly Successful People", advises that you should "begin with the end in mind." If you know where you want to end up in terms of net operating profit per year, you'll be able to work backwards from that number and calculate your projected expenses as well, arriving at the amount of sales you'll need to deliver these objectives.
Determine what your operating expenses will be. If you've been in business for awhile, you can predict based on your past expenses. If you have a new business, many of these figures will be estimates. With careful calculation, these estimates should be close to your actual expenses. The estimating process forces you to take a close look at what you expect for expenses, and this is important for accurate planning. Fill in amounts for each line item, and total them.
Compute your gross profit total. Add the net profit that you want to earn, to the expenses that you forecast, and you'll have a figure that represents the total gross profit of the business. This is the amount of money, in gross profit, that you'll need to earn to deliver on your net profit goals.
Forecast your sales revenue. To do this correctly, you need to know the gross profit percentage that you expect to earn on sales. If you've been in business, an average of the last couple of years should provide a good starting point for reference. If you're just starting out, you'll need to do some research on what typical gross profit margins are for your business. Multiply your projected gross profit amount by the percentage of gross profit margin that your business earns, to calculate the sales revenue required to deliver that gross profit amount.
Adjust your budget as necessary. If the total sales figure that you've arrived at seems too high for what you expect in sales revenue, you'll need to adjust and review your budget. Reduce expense categories to make the sales figure attainable. Increasing the gross profit margin even by a couple of tenths of a percent can have a big effect on your budget. Adjust this budget as necessary throughout the year to reflect increases or decreases in categories, and to keep your planning realistic.
Create a budget for each department in your business. Expand the single budget from one department into separate budgets that all fit together into one master budget. This will also help you to see how the different departments of your business operate together.
Consider using a zero-based budget. This is a budget that requires each expenditure to be justified in the new budget period. Incremental budgeting assumes that budget line item accounts from past time periods should be carried forward into the newest time period and possibly increased by a certain percentage. Zero-based budgeting allows for more budgetary control.
- Stephen Covey: "The Seven Habits of Highly Successful People:" Simon and Schuster, 1989
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