No matter how big or small the business, one thing successful businesses have in common is an effective and well thought out budget.
While having a budget is not mandatory, it is best practice as it allows you to effectively financial manage your business.
A budget is not a set and forget document. You don’t spend the time to create it, congratulate yourself on a job well done and then put it in the (virtual) drawer never to look at it again. A budget is a powerful tool and should be treated as a living and breathing document in your business.
We strongly believe that your budget should be created with your business goals and values in mind. There is no point in creating a budget for a business that does not suit your lifestyle or where you want the business to go.
Out top 5 reasons why every business should have a budget are:
1. Budgets provide structure
A budget provides your business structure with guidance and direction. It makes it clear what objectives you are trying to achieve not only from a revenue perspective but also with the operational running of your business.
Because your budget has been created with your goals and values, it also gives you a structure to make informed and effective decisions. Do you have the budget available to upgrade technology and equipment? Are you spending money on subscriptions that you are not using?
2. Budgets help you to predict cashflow
A 3-way budget provides incredible insights into your cashflow and movement as it takes into account not only your sales and expenses but also your working capital and other debt and financing activities.
Factoring in your payment cycles like quarterly BAS and super payments, annual registration payments etc, means you can not only predict your cashflow in advance but also make decisions to ensure you have the funds available at these times.
3. Budgets help you allocate resources
If your business is seasonal or cyclical resource allocation can be critical. Knowing you have the resources available during your quiet periods or downtime to continue paying wages and other costs gives you peace of mind and allows your business to continue trading.
Using your business drivers to calculate the variable parts of your budget allows you to more accurately not only allocate resources but also calculate the ROI. Examples of business drivers can include sales staff, the number of units produced or equipment utilisation.
For example, if you are a tour company, you can calculate the variable portion of your budget based on the number of each of the tours you provide. From this, you can then use the average number of km travelled for the tours to calculate vehicle downtime and the cost for servicing and maintenance.
4. Budgets help you model scenarios
Being able to model scenarios is one of the most helpful decision making tools for your business.
You are looking to hire a new sales person, and you expect there to be a 6 week period for them to get up to speed and reach their sales targets. What is the impact if that takes longer? What is the impact if you bring them on now vs in 6 months time?
Another good exercise is to complete a SWOT analysis for your business and model some scenarios around it.
5. Budgets allow you to measure performance
Every month you should review your accounts and compare your financials to your budget.
Are your sales higher or lower than forecast? Why?
Are your inventory levels higher than expected? Is this because sales were lower than forecasted or purchasing rates were higher?
Knowing your drivers and assumptions is particularly useful here as it will give you insights as to what has caused the variances.
When it comes to budgeting, practice makes perfect. Knowing all your business drivers and how they fit together takes real thought and understanding. Documenting these and your assumptions allows you to track, measure and report your business progress and refine your budget over time.
Need some help with your budget? Book a discovery call today!