Creating a budget for your business is a vital component of your business plan. Forecasting income and expenses will help business owners align their business plan and strategic objections to financial outcomes.
A budget is a forecast of business income, expenses and other payments and receipts. The budget should be organised in a way which readily determines the business’ profit and loss, capital expenditure, working capital, cash and debt requirements.
They can be simple or complex and can either be presented in a simple profit and loss format or as a three way Cashflow, Balance Sheet and Profit and Loss Statement. The latter is more effective and complete in allowing a business owner to assess cash, profit and value. If this is the first time you are preparing a budget, start with something simple and work your way up from there.
A budget can be prepared on a daily, weekly, monthly, quarterly or annual basis. Most are prepared for monthly reporting and consideration.
It is simple, if you can't measure it - you can't manage it.
The budget is a financial representation of the business plan. It is the financial outcome of the business strategic direction and initiatives implemented to achieve business plan objectives.
The budget will enable the business to measure the performance and the ultimate success of the business by comparison of actual results against desired (budgeted) outcomes.
At the very least a budget should enable a business owner to plan for and identify cash shortfalls and/or business losses which may require a change in strategy.
For instance, you may be budgeting for a loss in April. There may be a reason for that and that might be okay given the circumstances. It may also be the case that you could change a strategy initiative to counteract the loss. For example, you could increase your marketing spend at this time to increase sales or reduce staff hours to cut costs for that month.
A budget will also act as a measure to control costs by a comparison of actual costs to what was budgeted.
Creating a budget is a team effort and all senior stakeholders need to be involved in the budget to make it as accurate as possible. If you have a CFO, he/she would normally prepare the budget with input from the sales team, operations team, HR and the business owners. If you do not have a CFO, the budget should be a joint effort with input from across the business.
For a new business, the budget should be prepared before you go live. For businesses that already exist, the budget should be finalised before the commencement of the new financial year. It is common for the budget process to commence in April with finalisation and board approval (if needed) by 30 June each year so that the budget is ready to be implemented and reported on 1 July.
It is important that the budget is achievable and is stress tested for best and worst case scenarios. You’ll need to consider:
When preparing your budget be flexible and be real. Be honest in your assessment of sales and expenses.
Budgets and business plans are often prepared and then never see the light of day.
It is important that business owners meet and report on financial results on a monthly basis. Consider the below at each meeting:
The management team members should each report on their area of concern.
The CFO or business owner’s report should include:
If you are not achieving the financial results you desire, you’ll need to go back to your business plan and check your strategy and initiatives. Are you implementing the initiatives you said you would? Do the initiatives work? What do you need to change to achieve results?
Remember, the budget is there to help you achieve your business goals.
Challenge the status quo, look for efficiencies and if in need, seek help.
David is a Business Advisory specialist, and works in our Sydney office.
Before joining PKF Australia, David spent two years as a CFO in a successful, fast growing business, and for many years prior to this was a Partner with Crowe Horwath.
Bringing more than 25 years of experience, and coming from a diverse background, David has a unique understanding of a range of industry sectors. He provides advice to clients that include builders, property developers, importers, distributors, manufacturers, agribusiness and high net worth individuals.
By knowing the key drivers of his clients' organisations and understanding their tax and business needs, David is able to take a holistic approach to help solve their business problems.
David is a Chartered Accountant , Member of the Institute of Company Directors, and a Registered Tax Agent.
Click here for more information, and to contact David.