Budgeting (or forecasting) is vital to the ongoing success of your business. It helps ensure that, no matter what the world throws at you or your business, you’ll be well placed to negotiate the challenges you are presented with.
In addition, it will assist you in setting business goals and KPIs, evaluate performance, predicts cashflow, provide invaluable data when making important business decisions and make your business more nimble when opportunities arise.
So why, according to this survey from the US, are only 55% of small businesses bothering to do it?
I suspect it’s to do with finite time and resources. It can be difficult to step back and look at the big picture when the day-to-day pressures and priorities of running a business seem so much more pressing and urgent.
Plus, for those who aren’t fans of spreadsheets and walls of numbers, the process can appear daunting.
But it’s something you should be doing and, fortunately, there are a number of tools available to help you through the process. Not to mention that we are always available to help you.
But before we get into it, what exactly is a budget?
What is a budget?
A budget is a document that is used to predict the income and expenses and asset and liability movements of a business over a set period of time, be it monthly, quarterly, yearly or more.
It is not a static document. It should be updated and adjusted consistently as more information and data comes to light to ensure it’s as accurate as possible.
And, most importantly, it is a document that you, the business owner, are in the best position to prepare. Your bookkeeper, accountant, 2IC etc.will all have a good idea of how your business is performing but it’s you who truly knows the most about the business, so the responsibility in preparing and updating this crucial document falls on your shoulders.
How will it improve the performance of your business?
We briefly mentioned some of the benefits of budgeting earlier, but that was by no means an exhaustive list.
Budgeting, in addition to being useful in goal setting, performance evaluation, cash flow and agility, also works as a predictive tool enabling you to anticipate and plan for future developments, whether good or bad.
Based on these developments, a budget will also empower you to make more informed decisions. Making the optimal choices around paying off debt, setting business priorities, absorbing setbacks and capitalising on opportunities, are all made possible by budgets.
Making your budget better (accuracy)
Firstly, what does a budget look like? The Australian Government has provided a helpful starting point budget template available here.
Naturally, budgets are only as reliable and useful as the data being entered and it is up to you to be as honest and accurate as possible when estimating your incomes and outgoings, even if that sometimes leads you to some uncomfortable conclusions.
A great place to start when making your budget predictions is the history of your business. A look back over time can identify patterns and trends that are likely to continue and it’s also an opportunity to reflect on your long-term performance. Where can savings be made? What have been your most lucrative activities? Where have you improved or declined?
For start-ups, who don’t have a long history to draw from, there are a number of tools available to assist you in preparing a budget (these tools are also a great resource for established businesses.)
One of those is benchmarking, which according to the NSW Chamber of Commerce, “is the standard by which all inputs and outputs of a business are compared and measured.”
We have an earlier blog available here regarding benchmarking, but to summarise, it allows business owners to compare the performance of your business to others in your industry. The ATO has a great resource available here to help you begin the process of benchmarking.
Still unsure where to start? There are a number of software systems available to assist you in budgeting, with many using AI to help make accurate predictions and estimations. For example:
These are great starting points but again, these are simply tools you can use – they aren’t a solution – it’s how you use them.
Getting started and/or optimising your budgets
Hopefully, this article has demonstrated the importance of budgeting and the myriad ways it can improve your business. For those of you who remain unsure of whether you need one or don’t know where to start, we are here to help. Contact us if you have any questions or need some help getting started.
