A budget is often overlooked as part of business management yet it has a vital role in your success.  The budget provides a series of performance benchmarks that the operations of the organisation can be measured against.  As a result, key decisions can then be made with the purpose of increasing the profitability of the organisation.

Prior to commencing to prepare a budget you should undertake a review of the operations of the business over the previous 12 months and maybe even longer if relevant.  The importance of this review is to identify any key issues or outcomes and how they may impact on the operations of your business.  For example:

Were there any seasonal issues or trends that impacted on the business?  These may relate to sales or in particular individual product lines.
Did costs increase due to additional salary and wages or maybe the cost of raw materials increased?
If you are exposed to foreign currency then what was the impact of the high Australian dollar?
How effective were marketing campaigns and did they actually result in an increase in sales?
Were there any new competitors that entered your market or did any exiting competitors leave?

The above examples are just intended to highlight the purpose and the importance of this review as there are many other elements that could be identified depending on the industry you operate in.  Then the next step is to establish key objectives for the next 12 months.  These are not just a continuation of any trends that follow on from the previous 12 month but may include growth opportunities.  Once these have been established then it is important to prepare a business or strategic plan that has clear objectives, what actions you will need to undertake as well as key performance indicators to measure performance against the objectives and whether they were obtained.

Once this planning has been done you are now ready to prepare you budget.  The post next week will focus on how to prepare your budget.