On Budgets, Cashflow and Your Business
Budgets, don’t we love them?
In your small business, what approach do you use for your budgeting? Most budgets I see are based on the thinking of “last year plus 5%”. I have also seen budgets done by some pretty large franchise businesses that are, to put it bluntly, crap.
A budget needs to be approached from the aspect of “is it realistic, is it achievable, is it based on solid assumptions?” It also needs to take note of the environment within which the business operates. Over the past couple of decades, we have seen budgeting and planning programs proliferate. Search “Budget template” on Google and you will get 108 million results. Like anything, having a tool and knowing how to use it are two completely different things.
When you’re looking at your budgets, the issues you need to consider need to be delved into in some detail. Here are some examples (and the questions aren’t extensive):
- Increased sales (everyone works on this assumption) – where are they going to come from? Who are we selling to? Do we offer what they need? Can we supply the additional product/service and at what cost? Is the market being disrupted? Can we divert focus in to one or two high margin products that will deliver a better result?
- Profit margins – what do we need to do to improve them? What options do we have with pricing? What product mix works to deliver the best margins? Does our marketing support our pricing to deliver the margins? Does our sales team understand the impact of margins (hint: most don’t)? What are our competitors doing and where do we see them going?
- Operating overheads- what are we doing to ensure we are getting “bang for our buck” on expenses? What is happening with regard to our overheads and the potential to replace old approaches with new ones (esp software applications)? What control do our people have over the costs incurred in operating the business?
- Staffing – What do our team understand about the expectations and accountabilities of their roles? What additional training and support would enable them to flourish? What is the ideal team mix for a business such as where ours is moving?
- Capital expenditure – do we have the right gear, in the right condition, to enable us to deliver what is needed to support our team and customers? Do we need to invest in additional equipment to save costs over the medium/long term? What is the best utilisation of our capital to deliver strong, sustainable results over the medium/long term?
As stated, the list above is only a “taster” for the questions that need to be asked prior to even thinking about what the budget looks like. More often than not, where these types of questions are asked, they are asked after the budget has been done. This is like putting the cart before the horse.
Once you have done your overall budget, I strongly recommend that you do a cashflow budget that ties in to it. The assumptions you make in this should also be assessed to ensure you are making the right qualitative decisions for your business. For example, we have been dealing with one of our customers relating to one of their major debtors. Sure, the debtor (owes money to our guys) is a big customer. But the margins they make on the work they do for them are really small. Then, the debtor takes nearly four months to pay their account. Is he really a customer that they want? By the time they do the work, spend three months chasing payment (including heavy involvement from the Directors who could be better utilised building the business), the profit from doing the work has disappeared. Is that really what you’re wanting in your business? Maybe you already have it!
Doing the cashflow budget may cause you to go back and revisit your operating budget. The assumptions made might be called into question. This is a really powerful process to go through as you are considering all aspects of the performance of the business.
Remember that a budget is a forecast of what your results are going to look like. Doing your budget with the approach that your inputs will drive your results will give you a far more robust, realistic and achievable plan than doing it “the old way”.
By approaching the process in a way that allows you to develop solid, detailed and explainable budgets, you will actually be in a position where you are in far greater control of your business and you will be able to use those budgets to make better decisions along the way through the year. This moves you from working “in” the business to “on” the business.
Establishing budgets can be a time-consuming process. Yet it is be very valuable. The emphasis should be on qualitative questions to drive the quantitative outputs. By just focusing on the quantitative aspects of budgeting, you are missing out on a great opportunity to maximise your return. And isn’t this what you, as a business owner, should be looking to do?
If you want to (metaphorically) fall in love with your budgets once again, take the time to approach the process in a way which will enable you to get the reward and return you’re seeking. Last year plus 5% doesn’t work.
If you want to discuss how we can assist you in developing a really solid budget (and cashflow budget) for your business in the lead up to the end of financial year, please get in touch. Our first meeting is at no cost to you and is designed to provide you with significant value. It just might lead to you achieving the results you’ve always wanted.