The BIOS could only boot up from a CD/DVD disk, and not from an external hard drive. The BIOS, (Basic In Out System), is what is started as soon as the computer is powered up, and it checks and sets the computer hardware components, and allows Windows to start. The BIOS would need to be set to boot from a CD first. Most BIOS' do nowadays, but not all.
I've never quite understood Windows own backup utility. To use it to recover data you need Windows to be running, so if you don't have Windows you fall at the first hurdle. Therefore, it seems to me, a full backup of Windows using its own native backup doesn't work. It can be used to backup selected areas, but for those I would just use CD/DVD or an external disk and copy the files over.
For a true safety net, like you said, you would need a utility like Norton's Ghost or Acronis' True Image. With TrueImage, (which is what I use), you can create a true image of the whole Operating System and if you ever need to recover from a fatal crash you can use the TrueImage CD itself to boot up from, then it will be able to access the external drive.
However, perhaps the easiest way is just to copy all of your important and cannot lose personal files to the external, (documents, videos, photos, music, email settings, bookmarks or favorites, address book, etc), and then use the original XP CD to repair, or perform a format and clean install, then copy those files back from the external.
There's never an easy way to do this, and all can be susceptible to failure. But if you have those files copied to backup at least you don't lose them.
Since even external hard disks can fail, I would also backup those files to CD/DVD. They are less prone to failure.
I'm just about to reformat my computer but in case I muck it up somehow I want to make a back up of my xp system and save it on my external hard drive. Will I be able to boot my computer from this back up file if it all goes pear shaped and do I need a program like Acronis True Image Home or will windows back up utility do the same thing?
Sorry guys I'm a computer newbie and any help will be greatly appreciated.