Your labour budget should examine each individual operation of the business. The budget must pinpoint the specific personnel required to enable product development targets to be met. As a director, therefore, it is crucial that you ensure management has included sufficient people in the product development forecast. Only in this way can you be certain that the forecast number of production units can be physically achieved.
The final document in your overall budget and cashflow forecast is the profitability forecast. This document is a culmination of all key financial data outlined in each of the operating budgets that we have covered over the last three months.
Once your profitability forecast as been prepared, Key Performance Indicators (KPIs) should then be attributed to items such as:
- Gross profit percentage in the various business activities
- Labour to turnover percentage
- Average sale
Budgeted KPIs should be compared with KPIs established on actual financial accounts. If significant variances are revealed, these should be thoroughly investigated. It would generally be fairly unrealistic to expect significant changes in KPIs within the budget compared to actual performance in previous accounting periods.
Now you have an overview of the accurate budgets and cashflow forecasting process. Forecasting then adopting the budgets is only part of the process though. From there, it is vital to undertake regular monitoring of the company’s actual financial performance as compared to the budget.