So, after last month’s article about the need to have a financial plan, and how important it is to know your numbers, a business owner said to me “OK, so it’s all very well saying that I need a financial plan but how is that going to stop me going out of business?”
The truth is that it won’t stop it if that is what is going to happen to your business, but one with a plan which is being monitored regularly will enable the owner to foresee the issues before they become life-threatening , or indeed spot positive opportunities before they are missed, and do something before it’s too late.
It’s a regular cry from business owners who go out of business that they didn’t see it coming. “I didn’t expect such a large corporation tax bill” “I didn’t expect my purchases to go up so much so spent all the spare cash on a new machine” “I knew sales had dropped but I didn’t realise quite how much”
So, monthly financial reports can help plan how your business will operate compared with your expectations. And of course in order to do that you have to have clear expectations with which to compare them.
Once you have crystalised in your mind what it is you want to achieve in terms of overall profit and how you’re going to get there, then your budget is the dashboard by which you can measure your progress.
So what is a budget?
A budget is a collection of estimates about what the business will make in terms of revenue, and what costs will be incurred in making that revenue, and therefore an indication of the profit you can expect to achieve. On the assumption that the budget is there to help you work out how you will make the profit that you need to make, it is the prime tool to determine if the business plan you have put together is actually viable. And it will also tell you how much working capital you need to fund in order to achieve that goal.
In practical terms, it is a monthly estimate of:
Your net profit can be calculated by comparing the sales against the costs, so that you can see the monthly change to your expected financials.
When is the best time to put a budget together?
Well, if you are running your business already and you don’t have one then the answer is probably yesterday, or last week, or last year. In other words, you’re late! But better late than never, so the answer is about now.
What do I do with it when I have it?
Compare your actual sales with the targets you have identified in the budget on a regular monthly basis. If your sales figure doesn’t compare with the budget you set then ask yourself why the sales haven’t been achieved? Have you sold at a lower than planned average sale price, or have you simply not made enough sales? And what are you going to do about it? Or have you sold more?
Compare your actual costs with those you have estimated, both for purchases and overheads. Are the actuals higher than your estimates and if so why? Have you spent more because you have sold more or because the price at purchase is higher than you expected? What does that do to your bottom line? If it’s not enough, then what are you going to do about it?
By having a budget and comparing actuals against it, you are determining whether you are on track to achieve your goal for the year, ahead of it, or behind it. This gives you the means to take action to ensure that you get what you need from your business.
Check out our 12 Month Pand L Budget tool which can be a start point. Or if you would like help to build your budget then why not take advantage of our free Financial Review to help you understand better where you need to go.