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The importance of budgeting


The importance of budgeting

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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
                                                 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
• 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
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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