Whenever you mention the word ‘budget’, most people get a feeling of dread. Similar to the word ‘diet’, budget conjures up images of deprivation, scarcity and discipline. As a result, many business owners and managers try to postpone putting their budget together and, when they do, tend to put it away and forget about it. However, it’s important to consider your budget as a living breathing tool to help guide your business and keep it on track to achieving your goals.
How do you put together a budget?
Your budget is essentially your business plan for the next 12 months. It usually consists of an estimate of future sales and cash flow, an estimate of future expenses, and estimates of capital expenditure (capex) and financing arrangements. These estimates are used to produce a profit and loss, balance sheet and cash flow statement, known as a 3-way forecast.
What are the benefits of having a budget?
Your budget is an important tool for managing your business and shouldn’t be just filed away somewhere, never to be seen again. Instead you should be referring to it on a regular basis, at least once a month, to make sure you’re on track to achieve your goals.
So what are the benefits?
- It enables you to clearly quantify what is and isn’t working so you can take appropriate action.
- It can help align staff and management to overall organisational goals.
- It will assist in understand business drivers ensuring decision making is based on data rather than instinct.
- It will help you predict your business’ future financial performance.
What goes wrong?
There are a number of things that can happen to derail the budget. First of all, when the budget is developed, quite often only senior management is involved resulting in a disconnect between the aspirational goals of the budget and what is realistically achievable. By getting the rest of the team involved from the outset, you are not only more likely to set a more realistic budget but you will also get buy-in from your staff.
Budgets, like diets, can be difficult to stick to, resulting in a tendency to try to implement short-term ‘hacks’ to get back on track. This might include ‘fire sales’ to shift more stock, ‘creative accounting’ to make the figures look better or any one of a number of other quick fixes to ensure you achieve your budget. If you have your accountant or business adviser involved in the process, you have an external party who can help keep you accountable.
Rather than thinking that producing a budget is something to dread, see it as a tool to help keep you focussed on the bigger picture. Ask us how our 3 way forecasts can help you grow your business and achieve your strategic goals.