It is time to talk about the “B”-word…That’s right! It is Budget!
Whether you are managing a rambunctious household or a dynamic department, mention of the word usually elicits an exasperated sigh or groan and rapidly makes you the least popular person in the room. When you discuss budgets, people feel that it is either 1) Excel magic, 2) too unpractical due to market conditions, or 3) always changing due to product changes, making budgeting a pointless exercise.
Budgets refer to estimates of the potential revenue you can earn over the next year and what the associated costs would be to deliver that revenue and run your business. So why would you want to budget?
Budgets are not meant to be arbitrary numbers plucked from thin air and haphazardly thrown onto a spreadsheet, with fingers crossed for the best outcome. Budgeting is about understanding each number in your budget and your business, what influences it, what can impact it and what drivers you can implement to achieve or accelerate the number. Budgets are created to see if a business has achieved its potential or if it is over- or under-performing.
But, in my opinion, it is time to get excited about budgets and channel your inner “Budgeteer”! We all have that person inside us.
Let us unpack what budgets really mean to enable you to become a boffin of brilliant budgeting.
B: Budgets are also for fun!
Keep in mind that budgets are not just for recurring expenses, but also for utilizing funds towards activities that will bring your household or company great joy.
With that being said, you need to see this as a trade-off.
U: Understand your current financial position.
Gather all the information you need to make such an assessment. Only by having the information will you be able to make informed decisions.
D: Determine your financial priorities.
Set the goals your business needs to achieve, and the budget needed to support these goals.
Set realistic and achievable goals. List your short-term and long-term financial goals. Remember that these goals may change over time. But identifying it will be a great motivator to stick to your budget. After all: you will probably spend less if you know the savings are going towards a vacation!
Need I say more? The only thing that accountants love more than Excel is drafting a balance sheet! Use Excel to document and calculate your income and expenses.
T: Track your spending.
Track continuously and make adjustments where necessary. For example, incorporate spending limits and divide your expenses into “needs” and “wants”.
It is critical for a business to build reserves into its budgets. There must be savings to ensure that you can get through the tough times when they occur.
So practically – how do you focus on creating a successful budget:
- Define your strategy and plans for the year
- Spend time on your revenue streams. Calculate all revenue streams, from billable time for staff to annuity to new products
- Match your cost of sales expenses. What is required to deliver that revenue?
- Determine all the normal monthly expenses that are needed to run the business
- Spend time understanding your marketing and training costs and what return your need from the investments
- Plan for new investment areas and expansions
- Define what cash reserves you will be creating
- Create a year-on-year comparison with the prior year’s budget and actuals for reasonability
- Create a cash flow forecast
- Work out key ratios and metrics and ensure the numbers are within the expected ratio
- Compare to market standards where possible
- Ensure a sanity check of your plans and strategy
An efficient budget connects three things: People, data and processes. It does not matter whether this data refers to the grocery specials or extends to managing complex business spreadsheets. Data is data and it is the application of the principle that will make you a “Budgeteer” of note!