A successful business has control over its expenditure. Sales may bring in healthy revenues, but the income and profits you’re creating can quickly disappear if there's overspending on direct costs, operational costs, staff payroll or equipment. We’ve highlighted four ways to put solid budgeting at the heart of your business planning.
1. Embrace the power of budgeting
A thoughtful, well-crafted budget is your business plan innumbers. To get started:
- Review your historical fixed costs/overheads such as rent and utilities. You can then increase or decrease these costs in your budget based on planned increases or inflation.
- Review your historical variable costs such as labour and materials, and your expenditure as a percentage of your income. You can then increase or decrease these costs in your budget based on your labour needs (expansion or contraction), planned price increases from suppliers or inflation.
- Review your historical sales and then increase or decrease your revenue based on forward work, historical and current trends.
- Budget for seasonal patterns e.g. high summer trading, low winter trading.
- Check your gross profit and net profit against your historical performance. Adjust fixed costs, variable costs and income until your confident the profit is realistic and achievable.
- Regularly review your actual performance against the budget. This is a good way to check if your assumptions are still serving the business and identify any emerging issues.
- Test your budget. Change your assumptions and test the impact it has on your business. What if your fixed costs increase? What if your main supplier increases their prices? What happens if you add additional staff? What if sales slow? Testing your budget allows you to check and prepare for various "what if" scenarios.
- Reflect on your budget. Does it accurately capture all of the activities you're planning for the year ahead? Are you adding products? Selling into new markets? Moving to a new location? This is where you sense check that your budget accurate captures the strategic plan for your business.
2. Separate your personal and business finances
It’s tempting to think of the money in the business as ‘your money’ but it’s crucial that owner-operators/managing shareholders have a clear divide between the company’s money and their own money. A clean set of accounts is important for businesses with multiple shareholders, businesses that may need bank finance, businesses that are looking to raise third-party investment and where selling the business is part of your exit strategy.
3. Track your budgets, income and spending
Your budget is the first step in the process. Next is regularly reviewing your actual performance against the budget. This is a good way to check if your assumptions are still serving the business and identify any emerging issues. To improve your tracking:
- Make sure your accounting categories/codes are relevant to your business and easy to understand. This makes it convenient to categorise each expense as it’s incurred and gives you accurate and helpful financial reports to analyse.
- Review your spending. Is it in line with your budget? Can any overspending or underspending be explained? If there's overspending, do you need to make any interventions such as reducing non-essential costs or renegotiating prices with your suppliers? Or does the budget need to be changed to more accurately reflect your current costs?
- Review your income. Is it in line with your budget? Can any variances be explained? If there’s increased income, is it a one-off or the new normal? Do you need to take steps to increase stock or capability? If income is lower than expected, is it a timing issue or have market conditions changed? Do you need to check-in with customers or review your work pipeline? Do you need to increase your sales activity? Do you need to review your marketing activity?
4. Seek help
Financial management can be overwhelming, especially if you’re new to running a business, during growth periods or during challenging financial conditions, so don't be afraid to seek help from professionals. As your adviser, we can:
Setup or streamline your record-keeping, bookkeeping and financial reporting.
Give guidance on budgeting.
Prepare financial forecasts for banks.
Prepare accounts for sale.
Analyse your budget versus actual performance and provide recommendations.
Next steps:
1. If you would like to join a workshop on building a budget, please register your interest here: https://forms.office.com/r/eEcPUDi10g
2. If you are ready to create a budget for your business and would like some support, or you need a business forecast for a business loan or application please get in touch with us on (07) 571 0032 or by email:
Cam: cam@sgco.nz
Amanda: amanda@sgco.nz
Nika: nika@sgco.nz
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