You need a budget for your business. It doesn’t actually matter what size your business is – whether it’s a sole proprietor right through to a large corporation, if you’re looking to make your business a sustainable success, the budget will be the cornerstone of what you do.
The budget is important to your business not only because it helps you maintain its financial health, though knowing what revenue is coming in and what expenditure your business is making is certainly one of the major roles of a budget. There’s more to it than that. A budget also acts as a roadmap of sorts for your business; it shows you where you’re planning on spending the revenue that’s coming into the business, how profit might be used or distributed, and the cost of the major projects that you’re looking to undertake.
A budget also tells you at a glance if you can afford opportunities that can spring up out of nowhere. You may have a great hiring opportunity, but without a budget you could not be sure if payroll would be able to cover that opportunity. You might want to undertake a large advertising campaign, or expand the number of shops that you have, and, again, the budget will tell you if your company’s financial health can accommodate those opportunities.
Finally, a budget will help you account for the kind of future costs that can otherwise be pushed out of mind too easily. Everyone knows that tax time rolls around like clockwork every year, and yet so many business owners start to worry about that only as they’re filing their paperwork. Conversely, a budget can also help you prepare for the good times; if you run a business that has a highly seasonal revenue base (say, a swimwear store, when the difference in winter and summer revenues would be significant), then the budget will help you have clarity on how to get through the lean seasons, while maximising the opportunity of the lucrative ones.
How to build a business budget
For non-accountants, the idea of building a budget can be an intimidating one. It doesn’t need to be, though. Many people go into a budget with the wrong idea, thinking that they need to track and account for every dollar – this isn’t the case at all. A budget is not a formal document that you’ll be submitting to the tax department or similar. Instead, it should be a guide to assist you in making better spending decisions for your business, and finding new opportunities to improve the profitability of the business.
A budget can even be based on different revenue models. Some business leaders prefer to budget based on cash flow, while others like to estimate net income on an accrual basis. Either approach is fine, as the goal here is – again – to get an overview of the business and plan for its future. It’s not about drilling down to every dollar.
Other useful tips for building your budget:
Don’t create a budget by yourself
Within your organisation, there are going to be multiple people responsible for sticking to a budget, so make sure that you get their input. Ask them what they need within their particular field of responsibility, where they see waste and opportunities for better efficiency within the organisation, and where they feel inhibited in doing their work. The more people that you can get involved with the creation of the budget – at all levels within the organisation – the more true picture of the organisation it will paint.
Be conservative in your approach
While you should be approaching your business with a positive spirit, when setting down the budget itself, it pays to be conservative. The business world has a habit of throwing curveballs at the most inopportune times, and a conservative budget is the one that will have the capacity to absorb a body blow or two. If your targets are too high, or your spending is too on the edge, it’s only going to take a tiny disaster to tip you over.
The best budgets are the ones that are amended a few times over the course of the year to take into account new opportunities, unexpected loses, and so on. An organisation that is unwilling to deviate from an existing budget and rewrite it as circumstances change through the year won’t be agile enough.
Remember: a budget is not meant to be a crutch that prevents your organisation from making the investments that it needs to. Rather, a budget helps you to outline the vision for your company, and present a pathway to achieve that vision without creating a risk that the company could go bankrupt.
For more information on building and maintaining an effective budget, contact the team at Mackay Goodwin today – online or on 1300 750 599.