Budgeting

5. Budget Analysis

Analysing your budgets gives you the chance to deal with potential problems before they occur.

5.1 Your cash budget projects your future cash position month by month.

• If your overdraft is projected to be close to or over your limit, you need to take appropriate action.If you cannot, you may need to increase prices or ration sales to avoid the risk of bankruptcy through overtrading.
• If your cash position is extremely variable, you may need to analyse your cashflow into shorter time periods to see if a problem is likely at any point during a month.

5.2 Profit and loss budgets let you analyse projected margins and other key ratios.

• If margins are unsatisfactory, you may need to increase prices, reduce costs or focus on your most profitable lines.
• Growing businesses that are not yet profitable may find it useful to calculate the breakeven level of turnover.

5.3 Your projected balance sheet allows you to analyse stock turnover and other key figures.

• If working capital is growing faster than sales, you need to control it.
• Check how easily you can meet your financing payments.

5.4 Compare projected figures with previous years to see where performance is improving or deteriorating.

• You can also compare figures for projected margins and growth with those of other companies, or across different parts of your business.

5.5 Conduct sensitivity analyses to see how different outcomes affect performance.