Budgeting is the most useful forecasting tool available to most businesses, but developing a comprehensive budget is not always as easy as adding a percentage increase to last year’s figures.
The benefits of a budget can be game-changing for a growing business and little time is needed to create solid projections. If you use cloud accounting software for your business, it will have a budgeting feature already.
Be warned, however, there are many ways to make a budget look good on paper that are doomed to create problems by the end of the year. Using overly optimistic estimates of revenue or assuming temporary surges will continue into the future are classic examples and a good way to find yourself struggling at year-end to avoid a deficit.
A few common things that tend to get overlooked…
- Cash Flow – It is not often profitability that kills a business, but cash flow. Effective forecasting allows time to plan for busy or quiet periods, prepare for nasty tax bills, and enables you to be proactive about how your money is managed.
- Pricing – Consider whether your margins are appropriately covering your non-operating overheads. You may want to consider using a cost analysis approach to realise these expenses into your gross margin.
- Performance Indicators – Financial reports deal with historical figures which may not be the most reliable information with which to base your decision making. This is even truer for emerging businesses where rapid growth may be a distraction from the key business drivers. Your reporting system can be designed to work with your budget to monitor both high and low level indicators to give you the information you need.
Keep in mind your budget will not be completely accurate! It never happens and it likely never will, but that is not necessarily a bad thing. A budget is simply your best educated guess as to what may happen over a future period given a set of assumptions and your own experience. These forecasts can initially be very simple, but as your assumptions become more detailed and realistic over time, you may find your budget a better representation of what to expect.
Budgeting is a cooperative experience. To do it right you’ll need to take the time to partner with your management team and align the budget to your business strategy. We can help you get started, but as accountants we will not understand how your business works at a higher level. If you are not a numbers person we highly suggest you make it a priority.
Please feel free to contact your Accru office and have a discussion on how effective budgeting can assist your business. Accru offers a full range of business management services designed to improve business performance.
By Nicholas Gray, Accru Melbourne