7 steps to creating a business budget
It’s often one of the worst parts about running a business – the financials.
While you can have the best business ideas in the world, if you don’t have a budget it might be impossible to get them off the ground.
And while it’s important to remember that no forecast is absolutely perfect to the cent, operating without one doesn’t make sense either.
A lot of budgeting depends on the market, and who can predict that? The sign of a good budget is how close the forecasts get to the actuals.
So how does one prepare a budget that’s still relevant to the business in 12 months’ time? Here are seven tips.
1. Have a business plan
Or a strategic plan. Whatever you call it, it’s being clear about where you want the business to be this time next year. Mark Allsop, a partner at Deloitte Private, says the budget needs to be part of an annual business planning cycle. “Business owners need to have an understanding of what they want to achieve in the coming year and what their strategies are and time frames that support them to implement that,’’ Allsop says.
Budget needs to be part of the annual business cycle.
“You can call it a strategic plan, or a business plan, but it’s about what you want to achieve as a business over this coming budget period and then setting your budget to support that.” The strategy, he says, will affect the budget. “If you want to grow by 10%, what does that mean in budget terms?’’ he asks. “Does it mean you have to find 10% in new revenue? Can you get 10% growth at the bottom line which means you have to cut by 10%? Where are the efficiencies you would find?”
2. Understand historic performance
Is there any seasonality to your revenue and expenditure? Does it get quiet over Christmas or does it peak? Allsop says budgets need to look at the linkage between that seasonality, revenue and costs, and plan around that.
Make sure you have good people helping you.
Allsop says this is critical. “A lot of small businesses won’t have the capacity to have a high-end CFO or financial officer in-house.
“My view is they should lean heavily on their accountants and advisors. If they need assistance, they should be able to draw upon it from them. And for many small businesses, the owner should have a good handle on those things but be able to draw in the advice as required.”
3. Use cloud based accounting
Allsop says every business should have cloud based accounting to access financial information in real time. That makes for better budgets. “Historically the book keeper would do the books and then send it off to the accountant and there would probably be a bit of a lag between the business owner reading the report and the reporting period,’’ he says.
Cloud based accounting is instantaneous, allowing accountants to access information in real time.
“Now with cloud based accounting, it’s instantaneous. It gives them better access to information that helps them make informed decisions. You can see the accuracy of the information as it’s coming through so you’re better placed to assess whether or not it’s right and you’re better placed to respond with the budget.”
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4. Be flexible
Allsop says one of the problems many business budgets face is that they are written in stone when the market is always changing.
“My view is that it is best practice to have a look at your budget on a periodic basis and that can be every month or every quarter, depending on the business, and re-forecast if required,’’ he says.
“If you’re going really well you have to reforecast up. But if you’re not going so well and you have to reforecast back, you should have the flexibility to do that as well.”
5. The best budgets are created by a team
Allsop says: “If the business has multiple divisions, then the leaders who are responsible for the financial performance of that area need to be involved in the budgeting process because ultimately they will be the ones accountable for achieving it. They should be involved in setting it, both at a revenue and at a cost level.”
6. Use budget planning sessions
Some businesses have them offsite. Taking it outside of work creates a space for fuller discussion. But that’s up to the business. Nonetheless, Allsop says these sessions, wherever they might be held, are an important part of the process. Every budget needs them.
“It is good to get everyone together in that head space and talk about it on a collective basis,’’ he says.