Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsProfit and Loss BudgetA profi t and loss budget is an important tool for allbusinesses because where activities can generateprofi t, your business will be less dependent onexternal funding. The budget is a summary ofexpected income and expenses set against thestrategic plans for the budget period. This is usuallyone year, although, in some cases, the period canbe shorter or longer, depending on the purpose ofthe budget.Although your accountant can be of assistance in thepreparation of this budget, it is important thatyou understand how it has been developed andknow how to monitor the outcomes against theprepared budget to ensure that your businesswill achieve the required fi nancial outcomes.HintBy preparing aprofi t and lossbudget annually,you will be in aposition todetermine if yourfuture businessplans willsupport theongoing activitiesof your businessPreparing Profit and Loss BudgetThe key to successful preparation of a profi t and loss budget is to undertake theprocess in an orderly manner, involving all key staff and ensuring that the goalsof the business are clearly understood prior to the preparation. There are twomethods of preparing a profi t and loss budget:• Incremental – where the activities carried out in the previous year are usedas the basis for budget preparation.• Zero-based – where the budget is prepared without consideration of pastactivities.For annual budgeting, the preferred method would be incremental, aszero-based budgeting would require an enormous amount of dedicatedresources and time. In the case of project-based or activity-based budgets,zero-based may be more suitable, particularly for new projects where there isno previous fi nancial data.32Chapter 2-5 p22-65 Eng.indd 328/15/11 5:01:53 PM