Budgets are one of the most important business financial statements. If planned and managed well, a budget allows you to monitor the financial impact of your business decisions and operational plans.
What is a profit and loss budget?
The profit and loss budget is a summary of expected income and expenses. It's usually prepared annually but the period can be shorter or longer depending on what you're using the budget for.
For your profit and loss budget, income and expense information is set against the business operating plans for the budget period.
Your accountant can help you prepare your budget, but it's useful if you at least understand:
- how it's been developed
- how to track if your business is achieving your goals and staying within budget
Prepare a profit and loss budget
Start by understanding your business goals and involve relevant staff. This will help make sure your budget is aligned to your goals, and is prepared and reviewed by the appropriate people.
Document and follow a process for preparing an annual budget. The process might include steps such as these:
- Review the approved business operating plan and note all necessary activities for the budget period.
- Separate activities into existing and new for the new budget period.
- Document all assumptions made for the budget period.
- Review the previous year's profit and loss statements by regular periods, such as monthly or quarterly.
- Use the following financial statements template to prepare the profit and loss budget for the selected period.
Monitor your profit and loss budget
If you prepare your profit and loss statement (P&L) on a monthly basis, your budget will need to be separated into months for the budget period.
Monitor your budget against actual results regularly. This will help show whether your business is on track to meet the goals you were aiming for when you first prepared your budget.
When the actual results vary from the budget
At the end of each month:
- compare the actual results from your P&L with the budgeted results
- analyse and note down explanations for variances
- categorise all variances as either a 'timing' or 'permanent' variance
A timing variance is where the estimated result did not occur but is still expected to happen at some point in the future.
A permanent variance is where the expected event is not likely to occur at all.
This information will help minimise future variances. You will be able to try new or improved activities to make sure you can still achieve the strategic goals of your business.