On this page
- Profit and loss budget
- Create your profit and loss budget
- Manage and monitor your budget
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 is usually prepared annually although the period can be shorter or longer, depending on what you are going to use 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 need to understand how it has been developed. You also need to know how to monitor your business outcomes against the prepared budget so that you're tracking if your business is achieving the goals and remaining profitable.
Steps for preparing a profit and loss budget
Start by understanding your business goals and involve key staff. This ensures 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. Steps could include:
- review the approved business operating plan and note all required activities for the budget period
- separate activities into existing and new for the new budget period
- identify and document all assumptions that have been made for the budget period
- review prior year's profit and loss statements by regular periods (monthly, quarterly etc.)
- prepare the profit and loss budget for the selected period using the Financial statements template.
Monitor and manage your profit and loss budget
Where the profit and loss statement is prepared on a monthly basis, the budget will need to be separated into months for the budget period.
Regular monitoring of the 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 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.
This information will help minimise future variances. You’ll be able to implement new or improved activities to ensure you are still able to achieve the strategic goals of your business.