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The importance of budgeting
MANAGING YOUR BUSINESS The importance of budgeting Budgeting can give you a road map to follow for your business. It can also help you to further reduce costs. By Sue Hirst IN GOOD TIMES it’s easy to become excuse we often hear is “I don’t know Once you have done this you have relaxed about budgets and profit & loss what my income will be, so how can I do something to aim for and work with. Each reports because there is plenty of income, a budget?” My answer to this is, what month you can replace the budgeted but when times get tough it’s important to most businesses should know is their figures with actuals to create a ‘rolling also look closely at where the money is expected expenditure. budget’ which will tell you what your being spent. I recently went through this yearly results will be if you meet budget in exercise in my own business and came A simple budget the remaining months of the year. This up with approximately $250,000 of • You start by entering your fixed costs can be a very enlightening exercise and savings per year. Some savings are tough into a spreadsheet with a column for show where you need to focus attention to make but as a business owner, if you each month of the financial year, plus a on both income and expenditure. don’t make them, the cost could be total for the whole year. Fixed costs are Note: this can be the basis of a coming out of your own pocket. those that you incur whether you sell cashflow forecast by removing any non anything or not eg rent, wages etc. cash items such as depreciation and What are the key benefits businesses can • List all of your fixed cost items by line, entering an opening and closing bank gain from a good budget? The benefits and using the previous year and your balance for each month. You would also are: expectations for the coming year, enter need to enter any non profit & loss items • A budget helps you to determine a a monthly figure for each expense item. such as GST and Capital Expenditure. break-even number therefore providing • Enter a total formula for each month By doing this you will see the monthly a target to aim for each month. and the full year of expenses. future bank balance and where any extra • A regularly reviewed budget enables funding may be required. you to compare against actual • You now know what your break-even point is for each month and the year. performance and quickly identify losses Reviewing budgets and take remedial action. Break-even is the amount you need to sell to create neither a profit or loss but Budgets should be reviewed monthly. • Preparing a budget provides an a $0 result. This can be done by entering your budget opportunity to think about what you are into accounting software and printing an • Now you can enter an estimate of actual versus budget, profit & loss report going to spend and set limits for the income for each month. at the end of each month. business owner and staff. • If there are variable costs such as A budget is a guide to financial • A budget allows you to plan operations product purchases or labour, if it’s a performance of the business and a way to and gives those responsible a better service business, enter them just below quickly identify overspending and handle on things. the income. Variable costs are those potentially loss making situations. The • A budget is required for lending and that are incurred only when a sale is sooner this is done the less money that is demonstrates good management. made. lost or wasted. How should businesses approach • Enter a formula deducting the variable How can businesses reassess their budgeting for any transition in business costs from the income to give a gross expenditure in difficult times? The best direction? profit figure. way to reassess expenditure is to set Growing your business requires • Now add a final formula at the bottom aside some time to work through every financial as well as strategic planning. The deducting the fixed costs from the line of the profit and loss report for the first thing is to actually have a budget. gross profit to get your expected net previous year, and ask yourself the Very few small businesses have one. The profit figure. following questions: 24 | September 2008 MANAGING YOUR BUSINESS • Is there a better way of achieving this approximately $1000 per month by outcome? changing and consolidating our providers. • Is there a more cost effective way of doing this? A sensitive area is staff. This can also be a huge area of savings. Many SMEs What are some common changes don’t have an organisational chart – a businesses can make to their budgets clear picture of who does what in the during periods of cash constraints? Have business, and very few staff have job a look at the high percentage of spending descriptions. This happens often as a and look for ways to minimise them. result of years of growth and people For example if you operate from rented being added on in a disorganised premises have a look at the amount of manner. If you sit down and think laterally space you occupy. Is it appropriate for about what needs to be done in the the business now? Things change and business and who is doing it now, big Sue Hirst, Director, CAD Partners Pty Ltd what was appropriate in the past may not savings and efficiencies can be achieved. be the same now. Moving a business may Cad Partners (CFO On Call) is a team of In summary, a budget won’t magically Financial Controllers who can review your seem like a traumatic event, but if it’s solve your financial difficulties, but it will accounting systems and advise on how you going to make big savings to the bottom serve as an early warning device. You will can improve your cash position and line perhaps it’s worthwhile. profitability. be in a position to see the situation within Another example is telephone and one month as opposed to many months To see where you can make savings, CAD communications services. Have a close if you wait for your tax accounts at the partners would like to make an offer of a look at what you’re spending and the end of the year. When you do identify FREE ‘Profit and Loss Health Check’ to providers you’re paying. I was amazed areas where you can make savings, any readers of this publication. Please call us on when I looked closely at ours – we were 1300 36 24 36 or visit our web site at short-term pain from making these www.cadpartners.biz paying eight different providers. Some of changes will be long forgotten as your them were totally unnecessary. We saved bottom line quickly improves.
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