Most business owners have a clear picture in mind of what success looks like for their company, whether it be achieving a certain level of revenue, expanding into new markets, or providing top-notch products or services to their customers. This vision of success can serve as a powerful motivator to keep pushing forward, but it also requires a strategic plan to make it a reality, and that’s where a budget comes in.
While the idea of budgeting may seem daunting, implementing sound financial planning and control is essential to financial success. However, one that is frequently underestimated.
Budgeting is more than just bookkeeping.
It’s essential for clients to recognise that budgeting is much more than bookkeeping and keeping track of receipts. Budgeting and related reporting provide critical insight into their business’s performance and whether they’re progressing toward their financial goals. It also provides the knowledge and insights to make informed decisions and drive long-term success.
Business owners face a multitude of factors that can impact success, ranging from daily operations and long-term strategy to financial planning. Fortunately, by prioritising regular preparation, review, and analysis of a budget, you can help them stay on track and avoid costly mistakes.
In today’s highly competitive business environment, clearly understanding your financial position and outlook is essential. By helping clients prioritise budgeting in their business, you can set yourself apart as a savvy BAS Agent or bookkeeper with the strategic foresight to help them achieve their vision of success. As BAS agents, your role in guiding clients through the budgeting process is invaluable.
The benefits of budgeting
Budgeting is a powerful tool that allows individuals and businesses to plan their finances better by forecasting their income and expenses, allocating resources, and identifying potential financial shortfalls.
By clearly understanding the financial position, budgeting also improves financial decision-making, helping minimise financial risks and mistakes. Budgeting can be used as a financial management tool, helping individuals and businesses achieve their goals, avoid mistakes, and secure their financial future.
There are numerous benefits of budgeting for a business, including:
Financial Solvency:
Budgeting helps a business to plan and control its finances. It allows business owners to keep track of their cash flow and ensure they have enough funds to cover their expenses.
Goal-Setting:
A budget enables a business to set clear financial goals and work towards achieving them. It allows owners to prioritise their spending and investments, ensuring they have sufficient resources for future plans. Budgeting provides a road map for financial decision-making, making it easier to make informed decisions about investments, expenses, and revenue goals.
Performance Evaluation:
Budgeting provides a benchmark against which a business can measure its performance. It helps owners identify areas where they are exceeding or falling short of their targets so they can monitor operational performance and progress towards business objectives.
Decision Making:
A budget provides critical financial information that informs strategic decision-making. It helps owners evaluate the costs and benefits of different options and make informed choices about how to allocate resources and pursue growth opportunities with ease.
Resource Allocation:
Budgeting helps a business to allocate its resources effectively. It allows owners to identify areas where they may be overspending and redirect those resources to more critical areas of the business.
Investor Confidence:
A well-crafted budget can help to instil confidence in potential investors or lenders. It demonstrates that the business has a clear plan for managing its finances and achieving its goals.
Facilitation of Early Warning Signs:
By closely monitoring budgeted expenses and revenue, businesses can detect early warning signs of financial challenges, such as unexpected expenses, declining revenue, or cash flow issues. This enables businesses to adjust and take corrective action before the situation worsens.
So, what is a budget?
A budget is a financial plan that outlines an organisation’s projected revenues and expenses over a specific period. It is a detailed plan that estimates future revenue and costs and helps businesses to manage their finances effectively. A budget typically covers a period of one year and is broken down into monthly, quarterly or yearly segments.
Budgeting is a crucial aspect of planning for the financial future of a business. It requires a close look at the current capital of the business while working out its fixed costs, variable expenses, one-time fees, cash flow and projected revenues. Being aware of these numbers will allow you to help the business owner estimate the operation’s overall profitability.
Businesses operating for quite some time should have access to a comprehensive historical account of the company’s income and expenses. You can then use this information to analyse the company’s business performance and make informed decisions on the subsequent direction.
Which type of budget?
Depending on the size of the business, you may have the need for more than one type of budget. Here are some examples of typical budgets required in business today:
Financial budget
A financial budget is an overall plan that covers all aspects of a company’s finances, including its operating budget, capital expenditures, financing activities, and overall financial goals. It is typically developed annually and is used to guide the company’s financial decisions over the long term, such as investing in new equipment or raising capital.
Pro Tip: If you are just starting out with budgeting - start with a financial and cash budget.
Operating Budget
An operating budget focuses on a company’s day-to-day operations, including the revenues and expenses of producing and selling its products or services. It is similar to a Profit and Loss report and contains fixed costs, variable costs, capital costs and non-operating expenses.
It typically covers a specific period, such as a month, quarter, or year. It is used to track and control costs, manage cash flow, and ensure that the company’s resources are being used effectively. Most businesses prepare this at the start of the year and then evaluate it periodically as part of the business review process.
Cash Budget
The most commonly and easily understood form of a budget, a cash budget, is essential to run a business successfully. A cash budget includes expected sales, supplier payments, operating expenses, and other cash transactions. It will help identify whether or not there is enough cash to operate if funds are being used productively, or if there are areas spending can be cut.
Labour Budget
A labour budget is a financial plan outlining and estimating the labour required to achieve specific business objectives, such as producing a certain number of goods or providing a certain level of service. A labour budget considers the cost of wages, salaries, benefits, and other employment-related expenses, such as training and recruitment costs. It helps businesses to allocate their labour resources more effectively, manage expenses, and make informed decisions about staffing levels and wages.
Static Budget
A static budget is a financial plan that remains unchanged over the budget period, regardless of actual sales or other activity levels and is most useful when a company has highly predictable sales and expenses that are not expected to change much through the budgeting period.
Static budgets are frequently used by government agencies, educational institutions or not-for-profit organisations that have been allocated a fixed amount of funding in a financial period.
Master Budget
A master budget is a comprehensive financial plan that incorporates all of the smaller budgets within an organisation, such as the operating budget, financial budget, cash budget, and others. It includes financial and non-financial information and covers all aspects of a business’s operations.
A master budget is typically created annually and used as a roadmap to guide the company’s decision-making and resource allocation. It serves as a benchmark against which actual performance is measured, and any variances are analysed to identify areas where improvements can be made. The master budget is usually created by senior management, with input from department heads and other stakeholders.
Whatever type of budget you recommend, it is essential to remember that a budget should be a dynamic document that is reviewed and adjusted regularly to reflect the current state of the business.
A budget should not be created and forgotten about but continuously monitored and evaluated on its effectiveness in achieving the business goals.
Pro Tip: Schedule time in your calendar every month to review the budgets and see how they are tracking. Make it a non-negotiable part of your schedule.
What should you include in the budget?
What you include will depend on the type of budget you are creating and why you are making it. The more specific the business is about what they want to achieve through the budget, the better it will work for you.
Here are a few commonly used pieces of information required for budgets:
- Revenue. The money that a business expects to generate over the budget period should include all income sources, such as sales, investments, and loans.
- Expenses : These are the costs associated with running the business.
They can be broken down into:
- Fixed expenses, or costs that a business regularly pays, including rent, mortgage/utility payments, salaries, internet, and insurance,
- Variable expenses such as raw materials and goods or services with fluctuating prices such as fuel.
- One-off or start-up expenses. When starting a business, there may be one-off costs like a new vehicle or computers. Predicting these expenses can be challenging, but you can estimate them based on previous budgets. Some business owners also set aside a percentage for unexpected costs.
- Cash flow. Cash flowisthe movement of money in and out of the business. Understanding your cash flow is essential to plan for shortfalls or surpluses. Knowing a business’s busy and quiet periods will guide you to advise on making big purchases and reducing spending.
- Sales and revenue forecasts. These are estimates of how much a business will generate during the budget period.
- Profit and loss projections. A profit and loss projection is a financial statement that estimates a company’s revenue, expenses, and net income over a specific period. These projections will help to understand the business’s financial health and make informed decisions about future investments and spending.
- Debt and loan repayments. If the business has outstanding debts or loans, include repayment schedules in the budget.
How Budget Monitoring Boosts Overall Performance
By utilising a budget to measure and evaluate the company’s performance over an entire fiscal year, you can unlock its potential to impact more than just the financial aspects of the business. By reviewing and comparing the actual realised income and expenses to the budget predictions, you can gain valuable insights that can positively influence various areas of the business and make changes such as:
Improve Sales and marketing strategy.
Monitoring the budget will improve the existing sales and marketing strategy by providing valuable insights into what’s working and what’s not. Regularly reviewing marketing spend against budget will identify areas where they may be overspending and allow them to reallocate those resources to areas generating a higher return on investment.
On the flip side, budget monitoring can help track the effectiveness of marketing campaigns and sales initiatives. You can determine which campaigns and initiatives delivered the desired results by comparing the budgeted and actual expenses. The business decision becomes data-driven on where to focus marketing efforts and invest sales resources. In the future, they can optimise marketing spend and maximise sales revenue.
Pro Tip: Once you’ve monitored the budget for three months or more, consider which marketing channels generate the most revenue and recommend allocating more resources to these successful channels!
Streamline your supply chain.
Through regular budget reviews, businesses can evaluate the impact of their suppliers’ prices on their financial performance. By setting specific budgets for each expense, companies can identify discrepancies or overcharges in their supply chain expenditures. This provides an opportunity to explore alternative suppliers or service providers. For instance, a budget analysis may uncover that logistics costs exceed budget due to increased fuel or maintenance expenses. This information can then be used to adjust pricing and identify new cost-saving measures, ultimately improving the company’s bottom line.
Pro Tip: Reviewing the budget regularly can help prevent expenses from snowballing before the business gets into strife!
Set clear KPIs for employee productivity.
On an individual level, an annual budget can also improve the performance of everyone in the company by setting Key Performance Indicators (KPIs) for team members.
When utilised effectively, KPIs can create a focused workforce driven towards achieving specific goals. By setting measurable targets for each team member and regularly reviewing their progress towards achieving these goals, businesses can encourage employees to focus their efforts and prioritise their work to meet them.
KPIs can help align individual performance with the company’s overall objectives, helping to create a sense of purpose and direction for employees. When employees have clear goals and targets, they are more motivated to work towards achieving them. This focus on performance can also help to reduce waste and inefficiencies within the company, as employees become more aware of how their work impacts the bottom line.
Successfully forecast using the budget.
Forecasting via budgeting helps to create a clear picture of what the business expects to achieve in the upcoming period. It allows businesses to identify and prioritise financial goals and provides a roadmap for achieving those goals.
The budget forecast allows businesses to anticipate their financial position for the future based on the budgeted figures and make informed decisions accordingly. It helps businesses to identify potential risks and opportunities and take proactive measures to address them.
In addition to revenue and expense forecasting, budgeting helps businesses forecast cash flow, which is essential for maintaining healthy financial operations. Predicting cash flow allows businesses to plan for shortfalls and identify opportunities for investment or expansion.
Budget forecasts are broader than budgets since they are not used as an operational roadmap for the entire company. Instead, this tool creates a budget projection for analysing the variances between the budgeted values and the actual figures.
How To Create and Use a Budget Forecast
Understanding how to use budget information to forecast business performance will make you invaluable to the businesses you support. While they are busy working ‘in the business’, you can discover and provide them with valuable information to work ‘on the business’ shortening the time required for evaluation.
Start by breaking down the budget into specific periods within the upcoming fiscal year, reflecting the stream of revenues and expenditures of the business. Depending on the business needs, this can be evenly distributed or higher during certain times. Historical data from the previous year can be used as a reference to allocate the budget for different periods.
Next, establish KPIs to help the company and employees achieve results as close as possible to the budget. This will optimise the difficulty of performance goals and ensure that all actions being taken contribute to achieving the company’s vision and mission.
Finally, produce a budget and KPIs for the following fiscal year of the business. By following these steps, you can create a budget forecast that aligns with the business goals and helps them plan for success.
Review the budget regularly.
Regularly reviewing actual performance against the values of a budget forecast will allow you to address risks that could prevent the business from achieving its goals. Just as you wouldn’t embark on a journey without knowing your destination, a plan is crucial for running a business. And that’s precisely what a budget represents.
Reviewing budgets regularly is crucial to ensuring that a business stays on track and achieves its goals. It allows for an assessment of whether the company is spending within its means and whether its performance is in line with the projections made in the budget. This regular review helps identify areas where the company may need to adjust its spending or operations to improve performance and meet its objectives.
It’s common to find that many small businesses still need to develop a budget, or if they have one, they forget to review it periodically, which can cause issues. Creating a budget once will not help in the long run.
Business can be dynamic, and keeping track of performance is essential to ensure its success. Regularly reviewing revenue and expenses allows you to identify patterns and provide information for business owners to make informed decisions. Skipping this step will prevent them from achieving the year-end results they wanted when creating the business budget.
Regularly monitoring the budget will also allow you to objectively analyse variances in their performance. By considering how various factors have affected actual performance versus the budget, you can develop a realistic budget forecast that will help maintain or improve the financial health of your client’s business.
Summary: If you look after the pennies, the pounds will look after themselves.
- Plan for the success of your client’s business through careful budget preparation. By understanding and creating a budget for your clients, no matter how big or small, you can assist them in focusing their energy on areas that need it most.
- A business should have more than just the one KPI of profitability. Your approach should always be to educate on the value of monitoring income and expenses to assist in developing and improving company and employee operations.
- Knowing what information you require for the budget will influence how you monitor the company and its employee’s performance. Being aware of the numbers will assist you in providing essential information to businesses to make informed decisions that will shape their future.
- Maximise the benefits of having a business budget by reviewing it regularly. Find out which areas they did well and those which still have room for improvement.
- In business, not everyone is ‘good with numbers’ like you are, and you can stand out from the crowd by understanding and recommending the types of budgets that would most benefit your clients.
Read this article below as it breaks down different types of budgets and shows how they help businesses stay on top of their finances and plan for the future.