When the Federal Treasurer handed down the budget for the nation, we were prompted to think about budgets from the perspective of small businesses.
Often budgets are a necessary evil forced upon small businesses by lending institutions when they receive applications for finance. However preparing a business budget can yield many benefits, so let’s take a look at the main reasons why every small business owner should prepare a business budget for the new financial year and why not doing so could be the very reason for the failure of so many small businesses in Australia.
A budget is essentially a plan for a defined future period, normally prepared in twelve monthly cycles to track where money is going to come from and where it will be outlaid. All small business owners know where they’d like to be after twelve months of business, the budget simply highlights the path to arrive at your destination. The old motto, “Businesses don’t plan to fail, they just fail to plan” has never been more relevant in an ultra-competitive business environment.
Align all parts of the business
A well crafted budget will cover all aspects and departments within a business. By preparing an overall view of where the business is going, all departments will fall into line and have a clear plan of where they are going.
Marketing plans will have set targets to achieve, from keeping to a marketing budget to being able to check if they are meeting expected income targets. This is a great way to see if your annual spending on marketing is being effective in its targeting to the market. In a similar vein, the staffing aspect of a business can also be attuned to the budget.
If you know what your expected business growth is and what periods of the year and busier than others, staffing levels can be planned for and adjusted based on the budget. With staffing expenses being the biggest drain on cash flow for most small businesses this element can be a massive cost saver.
Guide to monitor progress towards goals
Often small business owners and their employees can become fatigued and end up just going through the motions set on following a daily routine with no real vision of where they are going. By having a set routine of reviewing the budget at least on a monthly basis, you are more likely to be motivated towards achieving the goals set out in the budget, and perhaps even going one step further and revising the budget to further motivate yourself and your team.
Focus your thoughts and actions on your goals
Keeping a physical copy of the budget in place where it will be regularly seen and read will serve to keep your eyes on the prize, and lead to better decision making on a regular basis. In a non-confronting way, it trains your thoughts to become aligned with the businesses goals to the point where it becomes second nature to the small business owner.
Business budgets should be readily available to all staff and stakeholders in the business. A budget is useless if only the business owner knows about it and does not share the future direction and goals of the business with the people most likely to affect the outcome: the staff.
Having the staff play a role in setting the budget for the year can, and will, motivate them to want to see budget parameters met. Of course, doing so will mean providing incentives for staff to want to meet the budget in either financial or non-financial ways, only you will know what rewards will work best in motivating your staff. This won’t be an issue for you because you’ve already factored these outlays into your budget on the assumption that the budget is met. If the budget is not met, then the expenses become irrelevant.
Promotes periodic internal reviews
Having a budget promotes and encourages the small business owner to conduct regular reviews of the business.
This can cover staff appraisal reviews, regular meetings with key suppliers to discuss pricing meeting with current customers to see where you can value add to the services you already provide. As well as this, it allows you to make sure all departments are on track to meet the budget goals, and if they aren’t to make fluid changes as needed to keep everyone on track for the end goals.
Often small business owners, especially solo business owners, fail to budget for large one off expenses, whether they be equipment purchases, taxation obligations or simply regular annual bills that only crop up once every twelve months. By factoring such one off issues into your annual budget, you are sure to have the necessary cash flow to cover these events, without putting unnecessary strain on the businesses resources.
Whilst putting together such a comprehensive business budget can drain your businesses resources in the short term, the long term benefits will more than outweigh the short term pain of setting aside the necessary time required to take this process seriously.
For the business owner not well versed or experienced in preparing budgets, all we can do is recommend that you don’t try and fly blind. Speak to your accountant or business consultant for advice on how to get started. Not only will they assist you in preparing the actual budget, it will create a great talking point for regular business reviews.
Remember that a budget should be a fluid document, and making changes to the budget is fine as long as you still end up where you want to be. Don’t fail to plan, otherwise you are almost certainly destined to plan to fail.
John Corias is a Senior Partner at m.a.s accountants.