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 – although the period can be shorter or longer depending on what you’re using the budget for.
Income and expense information is set against the business operating plans for the budget period. Your accountant can help you prepare the budget, but you should understand how it’s been developed.
You’ll also need to know how to monitor your business outcomes against the prepared budget – tracking if your business is achieving the goals and remaining profitable.
Profit and loss budget
Start by understanding your business goals and involve key staff. This will 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, with steps that could include:
- reviewing the approved business operating plan and note all required activities for the budget period
- separating activities into existing and new for the new budget period
- identifying and document all assumptions made for the budget period
- reviewing the previous year’s profit and loss statements by regular periods – monthly, quarterly
- preparing the profit and loss budget for the selected period using the financial statements template below.
Monitor and manage your profit and loss budget
Where the profit and loss statement is prepared on a monthly basis, your budget will need to be separated into months for the budget period.
Regular monitoring of your budget against actual results provides information on 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 the profit and loss statement – with the budgeted results
- note down and analyse any variances – with explanations
- 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.