How to Prepare your PM Budget?

It is not necessary to have advanced knowledge of finance and accounting to prepare a budget. A little discipline, willingness and order are enough when it comes to explaining the content of the document.

Budgets are tools that make it possible to visualize the origin and destination of a business' income and the relationship between assets and liabilities. It is true that there are many ways to prepare a budget. However, it is also true that all budgets establish standard categories for the tool to be useful. Let's look at the main ones:

a) Net income: All businesses have a net income that can be measured from time to time, usually on a monthly basis. This amount is equal to the money left in the box after deductions have been made.

b) Expenses: refers to the deductions of the previous point, such as the payment of taxes, payment of suppliers and distributors, payrolls, Social Security contributions, rent, among others. In this section there should be margin for other types of expenses that may arise.

c) Expense-revenue ratio: from this pairing, information can be extracted to determine the profitability of the businesses. If the margin is small, alternatives should be sought for a higher return; if it is positive, the issue is to analyze how these profits can be reinvested.

Applying the theory: an example of a budget

Next we are going to apply the three elements of the previous section in a concrete example: a fruit shop located in a residential neighbourhood. The steps that our entrepreneur must take into account to prepare his monthly budget are:

To have a tool for the elaboration of the document, which must be written. The most common is the Excel table, which gives the option of using more than one tab in the same document.

Elaborate a relation of net income, that is to say, the benefits that the fruit shop perceives in the period of time included. This figure is usually the result of the average revenue of the business in previous months.

Make a list of net and fixed expenses, that is, those that do not vary in any case: rent of the premises, payment of suppliers and distributors, water bills, electricity, taxes, payroll, social security, and so on.

Include a third list with variable expenses or whose sum suffers changes due to different circumstances: reforms, unforeseen, among others.

List net income and expenses. The figure obtained from this relation is what is known as real or total profits of the fruit shop during the month on which the budget is made.

Prepare projections. It is best to do it on a sheet or attached document. Our fruit bowl should leave a record of the small purposes it aspires to achieve during the month in question. The most common categories are: savings, business expansion, new hires, etc..

Establish priorities that arise from this list of projections. It is clear that not all objectives have the same degree of importance. Our fruit vendor, for example, wants to open a section dedicated to vegetables and then, with the profits obtained, hire one more employee in the premises.

Define what profits can be reinvested in those priorities and how we are going to do it. As a final step, our fruit vendor must decide how much he or she will spend on opening the vegetable section, what payments he or she will make to new suppliers, and how he or she plans to advertise the new section of the store.