Most small businesses do not prepare budgets. Experience tells us that the average small business owner doesn’t see enough benefit to justify spending time preparing a budget.
Are they right or are they missing something? And is there a way to prepare a budget that doesn’t consume hours of time?
What is a budget?
A budget is nothing more than an estimate of a business’ income and expenditure over a period of time. We accountants typically like to see an annual budget broken down into months.
In other words, a budget is what the business owner anticipates the profit & loss statement will look like.
A good budget will also identify any significant capital outlays that are anticipated. Eg a hospitality business should budget for refurbishment and equipment upgrades.
Why prepare a budget?
Preparing a budget involves looking to the future and anticipating how the business will perform in the next twelve months. Do you expect income to increase or decrease? Will there be any significant changes in costs?
This process gets the business owner really thinking about what is up ahead so that they can be proactive (& not reactive) in their response. Eg if a substantial increase in demand is anticipated, the business owner can get organised to be able to handle it.
On the flip-side, if the anticipated profit is too low, the business owner has a chance to do something about it.
Once prepared, the budget should not live in the bottom draw. It becomes a tool for checking how accurate the expectations have been and to identify if the business owner needs to tweak their planning in any way.
Actual versus budget results should be reviewed with your team to ensure that staff are working hard to achieve budget. Eg. in a hospitality business, staff responsible for rostering need to be aware of how wages are tracking against budget.
If revenue growth is not as high as anticipated, does the business need to scale back plans to invest in new staff or equipment? Or if costs have been kept lower than anticipated, can the owner bring forward plans to draw profits from the business?
Simply put, a budget is an essential tool that is used to proactively manage the business.
How can I prepare a budget?
Preparing a budget need not involve hours of grinding labour. In fact, it should take a relatively short amount of time if you approach it the right way and with the right tools.
The starting point is the profit & loss for the previous twelve months. This will give you a good baseline of what can be expected. You then need to review each of the line items and adjust for expectations. Eg adjust revenue for the anticipated increase in sales.
Staff should be involved in the budget process to:
- Reduce the amount of work for the owner(s);
- Get valuable insights from those at the coalface; and
- Get buy-in from staff.
Any decent accounting package will have inbuilt budget functionality (Eg Xero). This functionality will make it easy to get the budget set-up. It will also mean that you can easily produce budget variance reporting on an ongoing basis.
Sky Accountants are all about educating and empowering business owners. If you want to learn more about budgeting, or just need a few pointers, please do not hesitate to get in touch.
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