Want to improve your profits? – Start A Budget!

A budget is a listing of what you intend to earn and spend, usually during the next year, split into months
it outlines what you want to get done in your business in monetary terms.

Why Bother to Start a Budget?

Most people see budgeting as a chore, many avoid it and almost all business owners don’t prepare a truly useful budget – one that helps profit grow month after month.
The sole purpose of any business report is to drive more profitable decision-making – this is no different a budget should enable you to make more profitable decisions more quickly and easily – if it isn’t doing that then your budget is a hindrance not a help!
Generally, the incentives for starting a budget all usually boil down to one of two things, (or a combo of both)

  • Improve the financial performance and condition of your existing business
  • Test the financial viability of a proposed business (ie Budget BEFORE you start your start-up)

Either way, importantly the process of completing any budget also encourages the business to articulate its vision, strategy, and goals – which in turn keeps the business manager focused and so enables the staff, suppliers and customers to all stay on the same page.
Think of your Budget like a NaviMan (that electronic thing in the car that shouts directions so you don’t end up cross and lost). A budget is just like the calculated path and arrival time based on the destination you enter-in at the beginning. i.e. firstly you decide a destination (the equivalent of your business strategy) then the Naviman plots out how to get there (the equivalent of your budget).
I can almost hear you thinking “but why would I bother do that once a year, things change quickly, I need to act quickly and my budget ends up being irrelevant 90% of the time” – I totally agree the once a year approach just isn’t useful!
Use a Rolling Budget instead – Set your budget at the beginning of the year, track your progress for what you have achieved and then adjusts it to create a forecast of what you still intend to achieve.
Just like starting your holiday in Cairns and plugging Perth into Naviman – there is nothing to stop you choosing to go via Sydney for a scenic trip and then determining along the way that Perth is VERY far, and that Adelaide was a better destination instead…. You re-plot your adventure as you go, depending on the conditions and circumstances, so that you know what roads to take and stay clear about your overall direction – if you set out on the same trip with no map what-so-ever most likely you would get lost (and cross).
You know it is VITAL to adjust your business to market changes and economic forces – you must therefore also update your budget as you do so.
There is a lot to cover to get from ‘no budget’ to ‘rolling budget’ so I am going to split this into a three parts, posting over the next three weeks – the posts will all reference each other to make it easy:

PART 1 – (Below) Getting Started – this week
PART 2 – How to Build a Budget – week 2
PART 3 – Make your Budget work for you – week 3

AND if you are really keen you could do the steps each week and by the end of week three you will have a fully functional, profit improving budgeting system in place.

Getting Started is the hardest part, it requires getting a few mini-systems in place – but follow these steps and you will be off and budgeting.

How to start a budget

A Budget is an estimate of income and expenditure for a set period of time.  It is a Plan created to record, in financial terms, the goals and objectives of what you want to achieve in your business over a period.
A Forecast is a prediction of income and expenditure for a set period of time – It is based on what you have done already and where you are expecting to head based on that past experience
A Rolling Budget is a perpetual budget Starting with a 12 month budget this process adds a new month to the budget as soon as each month finishes the advantage is management will always have a budget that looks forward for one full year from today. It removes the need to annually spend a week ‘pulling your figures together’ by making it a much smaller and regularly task.
How to Start a Budget image

1. Gather your Budget Calculating Ingredients

I can create a basic budget simply from using my brain and my experience, and it will be pretty accurate, but then again I do it all the time (and have been doing it regularly now for more than 25 years) so I definitely should be pretty good at it!).
You can also do this entire process simply by making guestimates, and if it is all you have, or you are a new start-up then GO FOR IT!
Guessing a Budget will still be better than nothing because it allows you to improve and fine-tune it as you go. On the other hand, to increase your budget accuracy, before you start get yourself:

  • A few pieces of work-paper – your final budget will ideally be in a spreadsheet, but there are a few steps before that
  • Your current business plan/strategy (if you have one)
  • Last year’s tax return (the most recent one completed)
  • A copy of your last Income Statement – should be with your last BAS
  • Internet Access can also be helpful for checking costs and prices when we get to that step

2. Write down your Future Plans

Check your current Business Plan and think about what level of activity you want to achieve – what you want to change, and how you want to improve. Grab your work-paper and just jot stuff down – don’t even think too much about the numbers, some bullet points around goals and how you will achieve them is all you need. Starting as of Today consider what you want and will do during the coming 12 months; at this stage you are just creating some goals; create your business story…
Eg “I want to…”

  • Buy a new building, or piece of equipment
  • Employ 3 new staff
  • Make $500k profit”

Try to make a few notes on each one of the following areas of your business.

  1. Total sales – you want for the coming year – Volume and Revenue in big chunky totals
  2. Activities – you need to do to achieve these sales, eg, new customers, marketing campaigns, start writing a blog – this is about activities not costs so don’t worry about the numbers here yet
  3. Staffing – consider who you will need to employ to achieve step 1. above and roughly how much you are prepared to pay them
  4. Investments – do you need to buy new equipment, replace some existing stuff, or pay down some loans
  5. Profit – what do you want to take home at the end of the day

You will probably find as you move through this process you need to add to the activities section, and/or adjust your staffing section. When you have completed this you will have most of the “bones” of a working business plan re-drafted for the coming year.
This bit can be done over a week or so if you like to be really thorough – and remember to be realistic about what you can do in the next 12 months – don’t get carried away with enthusiasm and include so many activities that you need to work 36 hour days to get it all to happen!

3. Sort out your Future Plans into Budget Headings

Now you are ready to start your Budgeting. Start a new fresh page and working down the left hand side categorise all the incomes and costs relevant to your business achieving the goals in Step 2. above using the standard headings from your income statement as listed below.
Simply create a list of names at this stage no need to put in the dollars.

  1. Revenues – your sales, Fees, Rent, Royalties etc
  2. Cost Of Goods Sold and Direct Expenses – inputs needed to create your revenues
  3. Operating ExpensesAll the day-to-day running costs, advertising, staff salaries, rents, utilities phone etc
  4. Other Expenses – the costs of having a business rather than doing business – eg interest, taxes
  5. Other Income – Income from having a business rather than doing business – eg interest, refunds gifts
  6. Balance Sheet ImpactsAssets and Investments do you want and need to make such as increase your raw materials, inventory and/or stock on hand and What Liabilities and Loans will you do you want and need to pay off

Have a look at your last year’s expenses to ensure you have at least captured all of the categories of costs you had from last year. If you are a start-up use the internet to get hold of an income statement from a similar business and review their various headings.
Be really detailed – e.g. if you are going to need two different sorts of advertising, or two different projects will need advertising – make two lines for advertising and include the details in the label that way you can summaries later but can capture the details as you go.

Still to Come

Next post will continue with how to build your budget using the work from these foundations outlined above. We will be covering:

4. Applying the Dollars
5. Doing a Profitability Check

Budgeting is complicated but a really vital part of business success, it need not be overwhelming if you break the process down into easy blocks and are really clear about what you want to achieve.

REMEMBER It is all very well to make grand plans, but it has to be realistic, so check what you have been able to do previously, keep yourself grounded, and plan the small steps of change.