Small business budgets are empowering. They give you the knowledge and insight to eliminate wasteful spending and get to profitability faster.
Planning for business success with a solid budget
When you’re running a business, it’s easy to get caught up in the cycle of busyness day in and day out fixing problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets to regularly monitor finance and performance.
Structured business planning can make all the difference in the growth of your business and meeting your goals. Many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit.
When setting a business budget, you need good numbers. Don’t guess at what’s coming in and what’s going out. You could be making assumptions that just aren’t true. Take the time to look into your accounts and dig out the real figures. It might sound like hard work but it’s worth it.
Focus your energy
It’s time to create a focus for the direction of your business and provide targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. The budgeting/forecasting part of Business planning can give you:
- the ability to make continuous improvements and anticipate or adjust to problems
- reduce your stress by making a decision based on sound financial information
- improved clarity and focus to achieve your vision
If your business is growing, you may not always be able to be hands-on with every part of it or in control. You may have to split your budget/forecast up between different areas such as sales, production, marketing etc. You’ll find that money starts to move in many different directions through your organisation – budgets are a vital tool in ensuring that you stay in control of expenditure where a forecast is always rolling and adjusting as teh year progresses.
- control your finances
- ensure you can continue to fund your current commitments
- enable you to make confident financial decisions and meet your goals
- ensure you have enough money for your future projects and opportunities
Your budget/forecast will outline what you will spend your money on and how that spending will be financed as the year goes by. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future – defined by your plan that your business wants to achieve.
Setting a budget isn’t complicated but it can still help to involve an expert. We can double-check the numbers and help you make realistic predictions about business growth, upcoming expenses, and tax exposure. We can also advise you on what to do if the actual numbers deviate from the predicted ones.
Creating a budget
Creating, monitoring and managing a budget is key to business success and now is a great time to implement and start one. It should help you allocate resources where they are needed so that your business remains on track to achieve your goals for the year and most of all be profitable and successful. It doesn’t have to be complicated, you can simply work out what you are likely to earn and spend in the budget period based on your goals.
Begin by asking these questions:
- What are the projected sales for the budget period? Be realistic – if you overestimate, it will cause you problems in the future.
- What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service? You should know what your Gross Profit % is.
- What are the fixed costs or overheads? Expect these to go up by CPI, if you’re using last year figures.
You can even use last years figured to break down based on what you spent in the past for each account. But only use last years figures as a guide, not the answer as your business plan lays out where your priorities are and may also define where you might spend more or less this period.
Comparing your budget year on year can be an excellent way of benchmarking your business’ performance – you can compare your projected figures, for example, with previous years to measure your performance. Xero has some great reporting abilities and allows you to run several periods against each other to look for trends.
Key performance indicators
To boost your business’ performance you need to understand and monitor the key “drivers” of your business are. A driver is something that has a major impact on your business which could drive up or down. There are many factors affecting every business’ performance, so it is vital to focus on a handful of these and monitor them carefully which will be reflected by you business goals.
The three key drivers for most businesses are:
- working capital
Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis. You should be able to add your key drivers or KPI’s to your business dashboard and use this to quickly tell if you’re on track for your plans and adjust when needed.
Review, Review, Review & adjust
To use your budgets effectively, you will need to review and revise them on a regular basis. Using Xero will allow you to keep up to date budgets, and this will enable you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period. Best of all you can use Xero to save a custom report or favourite to run on a regular basis and make decisions quickly and in real time.
There are two main areas to consider in each review
Your actual income – each month compare your actual income with your sales budget, by:
- analysing the reasons for any shortfall – for example, lower sales volumes, flat sales, underperforming products or services
- considering the reasons for particularly high turnover – for example, whether your targets were too low, marketing is working, staff training etc
- comparing the timing of your income with your projections and checking that they fit, was there a change in weather, unforeseen new or closed businesses.
Your actual expenditure – regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability and make adjustments with ease. You should:
- look at how your fixed costs differed from your budget
- check that your variable costs were in line with your budget – normally variable costs adjust in line with your sales volume, but perhaps you found efficiencies or deefficiencies in staff or product lines.
- analyse any reasons for changes in the relationship between costs and turnover
- analyse any differences in the timing of your expenditure, for example by checking suppliers’ payment terms
To attract the right funding
Sometimes your budget may require extra capital to raise funds to hit targets or allow for teh growth required. It’s importants to:
- Have a robust growth plan – so investors have a clear idea of what you intend to do with their money, and how you’ll aim to achieve that.
- Improve your financial health – investors will want to see a healthy set of accounts, so be proactive about getting on top of cashflow, cost management and budgeting.
- Align your budget to your strategic plan – cost out every element of your growth plan and provide investors with a breakdown of how you’ll budget your spending.
Talk to us about accessing the right finance
If you’re looking to get in front of the right investors, come and talk to us about presenting your business plan and your financial reporting in the best possible light.
5 key elements to include in your business plan
To create a truly robust and meaningful plan:
- Outline your vision – explain WHY you’re in business and how you intend to add value for customers. For example ‘We promote a healthy lifestyle through organic produce’.
- Set out your goals – outline your personal goals as a founder, and your wider strategic goals for the business. Then explain how these key goals are aligned. If your aim is to exit in 10 years, build this into your long-term plan.
- Define your funding and budget – to start trading, you need finance, so outline the investment that’s needed and how you’ll access that funding. Then break down this initial investment pot into clear budgets for each operational area.
- Forecast sales and cashflow – define the profit number you need, then calculate the volume of sales needed to deliver that income – and give a clear breakdown of the cash inflows and outflows needed to achieve positive cashflow.
- Set your timelines for success – set key milestones and give the business some concrete deadlines for meeting the goals, sales and revenues that you’ve projected.
Talk to us about creating a watertight business plan.
We’ll help you define your purpose as a business, and systematically set out how you’ll achieve your aims, giving you the best possible blueprint for success.
Get in touch and let’s start planning.