First things first, what is a budget?
A budget is your planned income and spending for a period of time (eg. a month, a quarter, or a financial year) which helps you to allocate funds for particular expenditure items and operating/capital investment activities.
To put it in layman terms, a budget is like a financial goal for your business. It crystallises the abstract goals into quantifiable, numerical figures.
Why is a Budget Important to a Business Owner?
A financial budget for your business helps you to:
- set business goals
- make good business decisions
- get finance
By setting up a budget and tracking actual income and expenditure against this budget regularly, you can keep your pulse on cash on hand, business expenses, how much revenue is required you need to keep your business growing and other key financial indicators.
By committing your business goals to numbers to paper, you increase the chances of business success, essentially by anticipating future needs, cash required for expenditure and so on. You will find it easier to spot issues before they grow out of control.
In short, a budget puts you, as the business owner, right in the driver’s seat – in control with more certainty and confidence.
How to Create a Budget
A budget should comprise at least the following estimates/forecasts, using the last couple of year’s actual figures as a basis and guide, with appropriate adjustments based on information available on hand:
- Cost of sales or cost of goods sold
- Other expenses – rental, utilities, wages, etc.
For example, if your revenue was $100K last year, it may not be sensible to expect it to be $10 million this year. If your rental was $50K last year, it is more than likely to be adjusted upwards for CPI this year unless you are planning to move into smaller premises with lower rent.
A budget should be tabulated at least yearly, and divided up into 12 months to provide you with bite-sized chunks to manage regularly.
It will be useful to have blank columns next to your estimates/forecasts to fill in the actual results as the year progresses.
This is something you can do yourself with using free budget worksheets and templates available online.
However, it is always worthwhile calling in the experts (that’s us!) to ensure that you get it done correctly and that it will actually serve its purpose.
Test Various Scenarios when Setting your Budget
After you have set up your initial budget, financial modelling becomes a possibility. You can start adjusting the numbers for various scenarios, such as:
- What if sales go up by 15%? What is the increase in profit and cash flow?
- What if you lose your top 3 biggest clients and sales fall by 30%? What expenses would you have to trim in order to break-even?
- What if you hire another sales staff? How much would that cost in wages, equipment and other expenses? How much additional sales do you expect to generate from another staff member?
Budgets are Not Cast in Stone!
It is worthwhile bearing in mind that budgets are not cast in stone. External circumstances change, economic drivers change, government policies change and so on. The Covid-19 global pandemic is a case in point!
As the business situation changes, you can (and must) make changes to your forecasted figures and see what it means for your profit and cashflow, then use these figures to inform your business decisions.
If it is of any comfort, your budget and forecasts are always going to be wrong to some extent, simply because you can’t predict the future with accuracy. So it is almost certain that the budget will not be 100% correct. Nonetheless, it is important to set budgets and monitor them as they serve a guide posts for your business decisions.
Most importantly, don’t be afraid to ask for help with budgeting and forecasting!
Disclaimer: This blog post has been simplified to cover some key points of a budget for business owners. This should not be construed as advice from Glint Accountants. There are many other factors to be considered and each business situation is unique. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Geraldine Lee is Fellow of CPA Australia and virtual CFO. Here at Glint Accountants, we help you to understand the KPIs of your business and develop a strategy to ensure the profitability and growth of your business. After all, that’s what we do, day-in-day-out. Contact us today!