Budgets will permit the evaluation of different business plans as to their realism, during incorporation and at early stages.
The budget is also the most relevant tool for the board of directors when following the finances of the cooperative during the financial year. It is advisable to build the cooperative budget in accordance with the chart of accounts (profit and loss statement) used in accounting.
The annual budget is a calculation structured in the same way as the profit and loss statement and permitting the anticipation of the yearly revenue (= net sales or turnover) and the business expenditures. A budget is always an estimation based on certain hypotheses. If the default values change during the year, the annual budget must be rectified, leading to a new, adjusted budget.
An annual budget can be calculated in the following way: First you calculate the structural costs per year (salaries with non-wage labor costs, rent, communication, marketing, financial management, other operating costs etc.). Then you estimate the turnover and the variable costs due to sales (salaries with side expenditure, purchases etc.).
Different calculations are also necessary when bidding. For pricing purposes, you will have to calculate the actual price of certain services or goods are, plus the other expenses related to this product. After deducting the expenses, the sales price must generate a margin for the cooperative permitting it to pay general costs, like rents, marketing costs, financial services and communication costs. It is advisable to generate a surplus, which strengthens the capital of the cooperative and permits the preparation of the unexpected situations and expenses. Many cooperatives have decided that their invoicing must generate a margin of 5 to 15 % to cover the general costs. The actual percentage depends on the line of business and cost structure and the targeted surplus. And of course, the prices must be competitive compared to other actors in the same sector.
Annex: Cooperative budget example (.xlsx)