What does a budget mean to you? Is it a task you have to do and then put away until the next time? Is it a useful exercise that sets out your plan for the coming year?

Is it a nightmare that you follow slavishly, every shortfall a disaster?

Or perhaps it is it a necessary exercise for the bank, to get that overdraft? Or a way to examine your business afresh, setting benchmarks, standards and targets for everyone, individually and collectively?

A budget can be, and is, all these things and more. It is a time to look at your business and examine what is profitable (or not), who is profitable and where you, as a firm, are going.

Whole libraries of books have been written on the subject so a short article such as this can only scratch the surface.

In every business there is a cash cycle. That is the time it takes from paying wages, suppliers and other expenses to the time the cheque arrives in your bank.

Many firms use a very simple spreadsheet to forecast what is going to happen to the bank balance over the coming months. Combine this with your knowledge of expense patterns and you will know which parts of your business to pay particular attention to at any time.

At this stage we enter the whole world of management information that is available to your business. It is the way that you collect this information and use it that dictates how you make your business decisions.

Whether you decide from instinct, from information about the past, from projections you have formulated from your information base (your accounting and management systems) or sheer guesswork, those decisions can be right or wrong.

Instinct (or common sense) can be very powerful but even this requires basic information.

It is clear that you cannot set the proprietor's wages higher than your total income, but there are those who are in tune with their business while it remains relatively small and with low complexity, who can judge what can and cannot be done.

They will always tell you, "It's obvious" and are unable to explain exactly how they have come to that decision.

Perhaps they work harder than they are prepared to admit to get information to make their decisions.

Guesswork does work sometimes but in the same way that you can win the lottery? sometimes. So for most of us mere mortals our decisions have to be based on a combination of what happened in the past and the information generated from our information base.

Our firm has always been active in helping clients to understand their business and forecast their cash requirements. As a starting point, having up-to-date accounting records is most important.

Many clients engage us one or two days each month or quarter to maintain their records. Initially, many have done this solely for their VAT returns but have found that the information generated gives interim results.

By coding income and expenditure, simple budgeting and forecasting becomes relatively straightforward.

Thus many clients are now benefiting from a regular flow of crucial management information.

This gives you control, essential to ensure you are running your business, not it running you.

To have control you have to understand your business and its environment.

You must have information (preferably accurate and timely) to answer key questions: What do you do well?

What is the most profitable work? Where is that work coming from? What is it costing you? Knowledge is the key. Have that knowledge and you will have a tool to fashion success from the most unlikely of materials.

  • Tony is Corporate Finance Partner at JWP Creers, York.