If I asked you how your business is performing, you’d be able to answer right away
You would simply checking your P&L and balance sheet statements, but how about if I asked you how your business is doing in relation to the financial goals you set yourself this period? Are you on track, ahead or behind? Or can’t you say because you don’t have a budget to refer to?
It’s always surprising to us how many business owners don’t have a budget – especially when budgeting is something we’re all used to doing in our day to day lives outside of business.
Everyone knows that if you don’t manage your household budget effectively you won’t be able to pay essential bills, or be able to save money to afford luxuries like holidays and cars. Not working to a budget, you risk either over-extending yourself and getting into trouble, or leaving a surplus to languish in your bank account when you could be spending it on things you really need.
Do you have a budget for your business? If you don’t, now is a good time to start getting one in place, so that you’ll have it ready to implement from the beginning of the New Year.
What is a budget?
The simplest way to think of a budget is as your business plan expressed in financial terms. It will set out how you expect your business to perform over the next 12 months, detailing month by month the income you plan to generate, and the expenditure you plan to invest or incur in order to fulfil your plan.
It’s not set in stone of course – the reality is that you can’t know all the opportunities or challenges your business will face in the next year, but having a budget at least ensures you have something to measure against, so that at regular points you’ll be able to check where you are on your journey and make adjustments if you need to.
Why your business needs a budget
To help you look forwards
Drawing up a budget will help you to look into the future, and will push you to think seriously about key financial aspects of the year ahead such as what you expect your revenue and overheads to be, how income and expenditure will be distributed across the period, what investments you plan to make, and when any costs will be incurred
To focus you on detail
Following on closely from the above point, creating a budget will encourage you to consider details which are otherwise easily overlooked. If for example, you want to increase turnover and decide to generate additional sales leads by investing more in marketing, you’ll need to plan carefully where and when spend is to be made. If you want to recruit staff to deal with an uplift in sales, you’ll have to consider the timing of any recruitment activity, and besides budgeting for payroll costs, you’ll need to include allowances for additional overheads like training, and any additional assets and equipment new team members may require.
To add another dimension to your numbers
Financial reporting will tell you where you are right now, and your accounts will give you historic data so you can look back and compare performance year on year. While this information is crucial, it’s only by having a budget that you’ll be able to check at any moment in time your current position in relation to where you planned to be.
By breaking down your budget into a monthly analysis, you can input figures into your finance system, enabling you to measure actual monthly income and expenditure against your planned numbers for real, meaningful insight.
To be able to respond faster and make better decisions
Measuring actual performance against your budget throughout the year means you’ll see instantly if you’re drifting from your financial plan, and will be able to decide if you need to take any action.
If sales are up and income is a lot higher than you’d anticipated, you may want to consider bringing forward investment plans, or if profit is down, you might have to think about delaying some cash outlays – possibly even cutting your overheads. Either way, the information you need to make informed business decisions will always be at your fingertips, and there’s no danger of only becoming aware of critical data when it’s too late to do anything about it.
Getting started is simple!
Preparing a budget you can use next year should be a very straightforward exercise.
First of all you need to establish a baseline you can build on, and the easiest way to do this is to use the actual income and expenditure figures from your previous 12 month trading period. Input these figures into a simple spreadsheet month by month, breaking them down by item type, and hey presto, you have version 1.0 of your budget.
Now you need to put your thinking cap on and consider what factors are going to alter these numbers. You’ll need to allow for things like inflationary increases in material costs, pay increases for staff, and the expense of replacing assets that have come to the end of their working life. Next, if you have ambitions to grow your business, you’ll need to adjust your budget and show all the additional costs and revenue associated with your plans – spreading them across the year as you anticipate they will be incurred or received. Even relatively small growth plans are likely to impact on many areas of your budget.
If you’re determined to achieve your business goals next year, you need to capture your plans in a budget now.
For anyone keen to learn more about the basics of budgeting, we can thoroughly recommend the 90-Day Planning workshops run by ActionCOACH. There are events taking place on 9th and 14thDecember in Newbury and Witney respectively – and Inca has limited tickets available on special offer. Contact Amy for more information on this special offer!