In my experience, business success requires more than just hard work; it’s about applying your efforts in the appropriate direction. As the saying goes: If you don’t know where you’re going, you’re unlikely to get there.
A well-prepared business budget enables you set specific goals and then develop efficient strategies for achieving them. It’s a fundamental tool without which you won’t be able to set realistic financial targets or review your progress.
My advice is that you start the new financial year with the end in mind. This may sound strange, but it simply means being able to answer two important questions: “Where do I want my business to be this time next year?” and “What do I have to do to make that happen?” Your business budget can help you with the answers…
Sound budget planning requires three things: commitment, a structured approach and a review process.
For a business owner, budgeting is a core responsibility that you simply can’t do in your head or on scrap paper. Instead, when you invest the modest amount of time required to complete your budget accurately, it will repay you again and again with meaningful insights about the financial health of your business.
Without a budget, you are essentially flying blind when making day-to-day decisions, and you could end up missing your business targets.
Conversely, if you commit to creating a budget, all your questions about staffing, premises, production, financial systems and so on, can be thoughtfully considered with reference to accurate information. This is the process that allows you to monitor your progress towards your stated objectives.
Your business budget sets your revenue targets, monitors costs and aims to achieve a designated level of profitability, It’s the key to achieving your financial goals for the business.
When creating your business budget, you’ll need a proven structure:
- Select a format (or ask us to recommend one) for a ‘3-way budget’ that consists of projected profit & loss, cash flow and balance sheet. While invaluable for you as the business owner, a 3-way budget may also be useful for conversations with your bank.
- To start, you will need your most recent management accounts that outline your expenses and revenue. In general terms, the difference between your total expenses and total revenue will indicate your potential profit margin.
- The next step is to use management accounts to record your expected business expenses and revenue per month for the 12 months ahead.
- Once completed, you will be able to use your budget to appreciate how your decisions determine the course of your business year. For example, you can consider the likely impacts on revenue should you reduce or increase certain expenses.
- These insights will assist you to develop strategies for reducing costs and/or increasing revenue at particular times of the year, while considering the realities faced by your business at those times. The underlying goal is for you achieve your stated business goals.
Regular reviews of your budget that compare actual figures with expected figures provide accountability and illustrate the impact of your decisions. Reviews will suggest where and when adjustments need to be made within the business so that you may continue towards achieving your targets.
While a well-structured budget is the key to achieving your financial goals over the course of a year, the reality is that your business and your business environment are dynamic, and your budget will require tinkering at regular intervals to reflect fluctuations in revenue and expenses.
To make the most of the insights and opportunities a budget can bring, I recommend monthly budget reviews.
If you have a question about business budgeting (including how to maintain good management accounts) or you require assistance with your 2017-18 business budget, please contact me by phoning (07) 3171 4255 or emailing Grant Titman at firstname.lastname@example.org
The information contained in this article is general and is not intended to serve as advice. No warranty is given in relation to the accuracy or reliability of any information. Users should not act or fail to act on the basis of information contained herein. Users are encouraged to contact q4 financial professional advisers for advice concerning specific matters before making any decision.
A CPA and Director of q4 financial, Grant Titman brings leadership and the disciplined energy of an endurance runner to deliver ‘big picture’ outcomes for his firm and his clients.
Grant’s expertise includes and extends well beyond achieving profitability and growth for his clients’ businesses. His focus is squarely on helping his clients to achieve three key goals: extract wealth from their business; set and achieve long-term wealth objectives; and ultimately, enjoy financial freedom.