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The Secret to Creating a Business Budget You’ll Actually Use, Not Lose!
Posted on 4th July 2016 in Forecasting
Written by Hannah McIntyre
Business budgets are one of the most important financial statements for any company. If planned and managed well, a budget allows you to monitor the financial impact of your business decisions and operational plans
Running a business is not for the faint-hearted, especially in the early years when it can feel like every day you’re doing something completely new and out of your comfort zone. The hours are long and the responsibility is greater than you ever imagined. Thankfully, however, you absolutely love it and wouldn’t change it for the world. But, there are things you can do to make running your business easier, such as empowering the humble business budget.
Why do we even need a budget?
There are many reasons as to why creating a business budget is essential for all business owners, but the two main reasons are as follows:
- A business budget provides a blueprint for your company’s desired success, and an accurate measure of how it is performing, year-by-year
- Budgeting is the starting point for (what we believe to be) an even more important measure of success, your cash flow forecast; a vital piece of financial scenario planning for any company.
Why do business budgets so often collect dust?
We’ve fast-forwarded a bit here, but this sets the scene to understanding how not to approach it.
A budgets is all too often created in a spreadsheet, around the time of your end of financial year or when you’re just getting your business off the ground. They support you at the time, but once filed away they are rarely referred to again. And this is usually because they’re not visible on a daily basis. They sit on a virtual shelf in your computer or if printed are lost under piles of other paper.
How can we change this? By using a system that works for you, not against you. Spreadsheets appear ‘easy’ at first because they are familiar territory, and if you love working long hours on administrative tasks, such as updating the ‘actuals’ in your accounts package with your offline spreadsheet, then this could be the best route for you. But if not, then now is a good time to consider the value of your time to the business and where it is best invested.
The difference between a budget and a forecast
In essence, a business budget is a quantified projection for what a company wants to achieve, whereas a financial forecast is an estimate of what will actually be achieved.
The business budget may only be updated once a year, but it stands as a benchmark indicator with which to compare actual results and to highlight variances from expected performance. It represents a detailed record of the financial position that owners and management want to achieve during a certain period of time.
A business forecast, in particular a cash flow forecast, is all about now, not what you thought you would achieve at the time that you prepared your budget. It can be referred to and relied upon to help make business and operational decisions, such as adjustments to staffing, inventory levels, and seasonal promotional opportunities. It serves an integral role in the day-to-day running of a company for business owners.
So the key difference between a business budget and a business forecast is that the budget is a plan for where a business wants to go, while a forecast indicates where it is actually going.
Don’t stop at the budget, use this as a launchpad
It is important to remember, however, that due to the longer-term nature of a business budget, it may contain targets that are simply not achievable – either they were unrealistic from the outset or market circumstances may have changed to make them no longer viable. This is why we recommend you get started with budgets to articulate your plans for the business in financial terms.
Keep the business budget and reporting against these variances, but this is where your scenario planning and cash flow forecast come into play. Use them, copy them, play around with them, set ‘what if’ expectations and think through all possible outcomes. Don’t rely on the budget alone. Use it as a guide, and be sure to tweak your forecast daily to make sure that it always tallies with current market activities.
A business budget should help small business owners to steer the company towards growth by pinpointing fairly accurately where income, spending and profit stand versus monthly and yearly targets. The best way to do this is to use sales, cost and profit data from past years as an accurate starting-point to budget for the coming year.
For all business startups, however, there is no historical financial reporting with which to base a business budget on, which means figures for sales, costs and profit are based purely on estimates. In this scenario, the figures you use should reflect your business goals and ambitions. If you have no experience in your marketplace, be sure to do your homework. Research the market in detail, find out about your competition, and most importantly, be realistic.
Dynamic forecasting with FUTRLI
It is always good practice to plan for both best-case and worst-case scenarios. That way you can be sure to always be prepared for whatever the market or life throws at you. But wouldn’t it be great if you could have limitless P&L, balance sheet and cash flow forecasting scenarios, and be able to visualise and compare these outcomes side-by-side? Well we thought so, so we set about creating dynamic scenario boards tailored to your business so that now you can benefit from a 360º view at all times.
But in all of your scenarios, don’t forget to factor in yourself! One of the biggest mistakes small businesses owners make is to forget to incorporate their own time. Time is money, especially when working with people who are paid for their time, so be sure to treat your time like your money, and set external deadlines later than when you think the project will actually be done.
Nine points that your budget should include
And don’t leave your annual budget to the end of the year. Keep regularly updating it on a month-by-month basis, making sure to adjust monthly predictions if your business is likely to experience seasonal sales peaks during the year. This helps to focus your mind on costs, reminds you of business issues and gives you an accurate snapshot of how the company is performing against targets. For long-term financial planning, quarterly budgets are more useful.
A clear and precise annual business budget should include the following:
- an outline of changes that you want to make to your business
- potential changes to your market, customers and competition
- your objectives and goals for the year
- your key performance indicators
- any issues or problems
- any operational changes
- information about your management and people
- your financial performance and forecasts
- details of investment in the business
Collaboration is key
Most small businesses start off with one annual business budget, but as your business grows your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets. But this isn’t something that business owners should struggle to do on their own. This is the perfect opportunity to ensure your managers are taking responsibility for their departments. Make them accountable for sales figures, profit margins and business growth by getting them to create their own business budgets.
By sharing figures and collaborating on outcomes, you can empower your workforce, boost morale, and really make them feel like they are a part of the business, and it’s success.
And don’t be afraid to ask your accountant to help you to prepare your business budgets, although you should always make sure that you thoroughly understand how they have been developed. You also need to know how to monitor your business outcomes against the prepared budgets so that you can track whether or not your business is achieving its goals and remaining profitable.
Business budgets are one of the most important financial statements for any company. If planned and managed well, a budget allows you to monitor the financial impact of your business decisions and operational plans, and in short, to become an informed and intelligent business owner.