As business advisors, our first point of call when dealing with any client who is struggling to meet their goals is to implement a budget. We see it as a critical foundational document for any business, and consider any business without a budget to be essentially flying blind.
Many businesses we come across however are doing exactly that, and are often unsure where to start, and too time poor to sit down and learn how to put one together. In reality, a budget doesn't have to be overly complex, and doesn't need to be pinpoint accurate either, so long as it contains the following core qualities:
Your budget should be aligned with your goals as the business owner/leadership group
The budget should be realistic, with key components grounded in some kind of reality
The budget should be simple to follow and understand by whoever is expected to use it (i.e. you and your key staff members, perhaps even the wider team)
The budget should be regularly reviewed and tweaked when necessary.
So, let's dive into how you can achieve this.
Where to start
If you are an established business, an excellent place to start is your most recent financial year results. So long as you are confident in the quality of your bookkeeping, the prior year records are a great starting place as they will inform you on where you are at now, and allow you to quickly formulate an "all being equal" starting position from which you can tweak and set new goals accordingly. You might take budget time as an opportunity to review your costs and cut the fat as well as analyse your sales pipeline to determine where you'd like to expand in the future.
If you are a new business, it can be a bit more tricky, but less so than you might think.
If you've recently gone into a new venture in your profession, you might start at the bottom line (i.e. what you would like to pay yourself, whether that be aiming to replace what was previously your wage, perhaps with a little bonus on top). From there, you should try to nail down as many unknowns as possible, whether that be engaging with suppliers to learn what you will need to pay them or speaking with others in the industry to get a grip on cost structures and so on. With the knowledge of your costs and your desired income, you can then determine how many dollars of sales you will need to generate to cover those costs, and perhaps include a buffer for safety/unknowns.
Focus in on the Key Balances
This is where budgeting can go from a weeks long exercise that leads to an overly complex document, to something that is user friendly and achievable in a short amount of time. We like to promote the 80/20 rule here, which basically means that you should focus your attention on getting the major accounts and balances right, and being happy with loose estimates for the remaining immaterial items.
For example, sales is always going to be an important focus area. When budgeting for sales, you might go into detail in determining who your prior clients are, who is likely to come back as a repeat customer, analysing your marketing pipeline and your sources of leads to determine your monthly sales goals. In terms of costs, big ticket items like wages or materials used in manufacturing your products will be the keys, and therefore getting these right will give you clarity on a large percentage of your total costs. You might map out how many staff on hand, when you will bring in that new hire etc so that your budget is very accurate in these areas. For smaller income or expense items, you might then simply take a generalized approach such as taking last years figure and applying a 5% inflationary increase.
Simplify & Explain
Once your background work is complete and budget ready, it is useful to break it down into manageable chunks, that you can then explain to the people within your business who's output will be tied to the budget.
For example, you may break down your sales budget down into regions that you can then talk through with regional sales managers. They don't necessarily need to see the full budget, but a clear understanding on how you arrived at the budgeted figures for their area will be useful to them in having direction on how to drive their team to achieve their goals. A procurement manager might be made privvy to the "GP level" of your budget (sales and direct costs). Using that information, you can align them with your desired profit margin, and so equipped with that knowledge and an understanding of your sales pricing, they will have a clear picture of how much they should be spending on stock.
Reflect & Adapt
Budget's don't belong in the bottom drawer!
Once the document is created and circulated to the team, it is important to regularly check in to your performance versus the budget.
An efficient month end close off of your books and an accounting package like Xero can really help this process, as having access to budget versus actual data in a timely fashion can help you catch areas of poor performance QUICKLY and allow you to take action. As each month passes, comparing your actual results versus your budget, reflecting on the key variances and using the knowledge of the relevant department heads in your business to dissect the outcome can be really crucial in doing better in the future. For example, if sales don't quite stack up to your targets, an effective report will allow you to nail down which area of the business has missed it's goals, allow you to speak with the powers that be in that area to determine the root of the issue, and allow you to recover before it's too late.
If you would like to enquire with myself or my business partner Jayden Hamer about how we can assist you in preparing a budget and the other services we offer, you may do so from the contact page of our website or by emailing your enquiry to enquiries@jetaa.com.au.
Written by Ben Audino
