When you apply your budget right, from the start, it is the one thing you can control
Two things business owners learnt fast during 2020: one, they cannot always be in control, two, they are certainly much more at the mercy of unexpected challenges than they ever thought.
Without a doubt, businesses have been forced to step out of their comfort zone and adapt business processes in 2020.
Control, which is the power to direct or to have influence over something, provides that safe space in which most businesses flourish. We are oh so familiar with that powerful and uncomfortable tension between the need for a sense of control and the evidence of inadequate control when things are not going according to plan, aren’t we?
Let’s look at one of these controls we can put in place – budgeting.
Budgeting is the process of creating a plan to spend money, fund current and future commitments and projects, and to determine in advance whether your business will reach its desired goals. A survey by research firm Clutch in 2018 indicated that 61% of small businesses didn’t have an official documented budget.
To gain back more control, we suggest starting with a budget. It’s the one thing you can control, especially with a helping hand from an outsourced and objective business advisor.
Importance of budgeting
A budget will force you to clearly set out the desired long-term goals of your business – if you have not already done so. And it will help force you to set out the path to achieve these desired goals. You will be able to track the progress on whether you are achieving these goals. It will also help you to keep your eye on the big prize.
Gone will be the days that you do not know on what your business is spending. A realistic and achievable budget will form the foundation for cashflow planning. With a budget you will know exactly how much you are spending and where your resources are applied. This will help you make good decisions for the business such as deciding on which expenses you can do without. Perhaps the time for renegotiating supplier terms are long overdue or perhaps these contracts or terms have become irrelevant all together.
If there are no control systems in place, planning is irrelevant. If there aren’t any planning in place, it will be a challenge to achieve business objectives and grow.
Here are a few handy tips on how to approach your budget:
The starting block for setting up a new budget is to have a clear view of the actual company performance for the preceding period. Onboarding cloud-accounting software like Xero will enable you to have a real-time view of the actual performance of the company. This comprehensive information and critical analysis should form the base of your budget, and not simply the Blue Sky profit you hope to earn.
Scrutinise your historical revenue performance to identify possible seasonal trends that should be included in the new budget. Review your historical expenses with a magnifying glass and get to the bottom of where the money is going. Don’t be afraid to ask the hard question:
· How easy or difficult was it to derive this revenue?
· What was the reason for fluctuations from month-to-month and what can be done differently this time?
· What was the largest expenses that were incurred, and did it derive revenue?
· If you are outsourcing you marketing function and have seen a large increase in revenue, perhaps you should spend more!
· What are the monthly recurring costs, and ask yourself if you are not paying too much?
· What was that big once-off unforeseen expenses that were on top of everyone’s financial challenge list, and should you provide for it this time around?
Use this information to compile the revenue strategy for your budget and don’t forget to include the new revenue stream(s) and expansion possibilities that align with the desired business goals, which are starting to materialise.
Project your budget based on all these discoveries and include any strategic investments or expansions so that you have a smartly planned tool to navigate your business on its goal path. It’s important to wear both your ambitious and realistic hat, but don’t underestimate new possibilities.
Don’t forget to review your finances on a monthly basis to ensure that you stay on track. Compare actuals against budgeted figures so that you know exactly what happened. This will enable you to improve and adjust the budget as new information comes to your attention, staying ahead of any unexpected and unwelcome surprises.
Gain insights from outside
You certainly do not have to do it alone. Budgeting should not be a restrictive and limiting measure, but rather serve as the measuring tool to evaluate your business goals and performance. Reach out to your trusted advisor or accountant to assist you gaining back control over your business finances.
The transparency into your business finances will enable you to easily identify pitfalls in your business with added peace of mind, enabling you to count less sheep at night and making sound business decisions. Remember that sense of control we were talking about earlier?