The budget is produced annually and consists of a profit and loss account, balance sheet, cash flow forecast and backing schedules (e.g. sales breakdown, personnel costs, fixed asset spend). It is normally prepared for a 12 month period broken down into months. If a 3 year budget is required for a business plan then the budget can easily be extended.

The aim of the profit and loss account is to set targets for sales and expenditure for the coming year to calculate the anticipated profit/loss. The budget should identify profitable/non profitable sales items, include new personnel (including their associated costs), project spending plans and expansion/contraction of business premises.

The balance sheet and cash flow are calculated from the profit and loss account. The balance sheet shows the assets (including working capital) and the liabilities of the business for the year. The cash flow demonstrates if there is enough cash in the business to ensure the business is solvent for the coming year.

Each month the budget figures are replaced by the actual figures and the year end result becomes a forecast. At the end of each quarter the budget figures for the remaining months are reviewed and updated as required to give the year end forecast. The format of the forecast is the same as the budget.

Forecasts are required as there could be a significant change to the business e.g. loss/gain of a major contract and management need to be aware of how this change affects the business and may need to make decisions to mitigate the change.

In addition the forecast gives management a better idea of the year end result as the year end draws near so decisions can be made about dividends and tax planning.

Management accounts are produced from the financial records of the business at the end of each month using the same format as the budget and forecast.

The figures in the management accounts are compared to the budget and forecast and a commentary is compiled to explain to management why there are discrepancies.

Management accounts show the actual results of the business for the month and year to date and show management if the company is performing better/worse than expected.

The weekly cash flow forecast shows all the cash which the business expects to receive from sales and to pay out to employees, suppliers, creditors (including PAYE/NIC and VAT) over a 13 week period.

This report is updated each week to compare the actual results against the forecast for the corresponding week and the forecast for the remaining weeks is updated to reflect any changes where the actual results do not equal the forecast. Each week the report is extended by one week.

The report shows if there is to be a cash shortfall or surplus. If there is a shortfall management need to ensure this is covered e.g. by an overdraft facility. Conversely if there is a cash surplus this should be put on deposit to maximise interest income.

The review of financial systems and controls involves an in depth look at the financial processes of the business by documenting the systems and controls and reporting to management where they do not conform to best business practice.

Good controls are essential to ensure all information is processed efficiently and reports are produced for management in a timely manner. Directors have to report on the financial records of the company in the statutory accounts and good financial systems and controls enable them to do this. Finally good controls help to deter fraud which could potentially lead to a financial loss to the company.