If you are not sure what a budget can do to drive your business growth and decision-making then last week’s blog “Why Every Growing Business Needs a Realistic Budget” is important reading because budgeting and planning are the most effective tools you can use to achieve business growth and stay sane.
Creating a budget shouldn’t be a nightmare, although I talk to many business owners and department heads who find this process overwhelming. My goal is to take out the overwhelm once and for all. Setting everything up right and creating a truly usable budget template is the hardest part of the process. Do that once and future budgets will be relatively easy.
Step #1: Get Out Your Last Budget
You probably already have some sort of budget in place so getting that out is a good place to start, even if you haven’t looked at it since you put it together last year.
Step #2: Set Aside Time To Work On Your Budget
This is critical. If your last budget just sat in a drawer it’s probably because a) you didn’t know how to use it; and b) it was not as accurate and comprehensive as it needed to be. If you are going to use your budget to guide your decision-making and growth then you need to ensure it truly reflects your business reality and your business vision.
Step #3: Gather the Information You Need in Advance.
Before the time you have scheduled to sit down and work on your budget, you need to gather some information. It’s much better to do this in advance because you don’t want anything to interrupt the flow of budget creation, especially if you already have a mental resistance to creating a budget. Nothing is more frustrating than sitting down to work on it and then realising you don’t have all the facts you need.
Your budget needs to based on the full financial commitments of your business both currently and under your future expansion plans.
You’ll need the following information (minimum):
• Bank statements (or Xero Statement) to calculate current income, expenses and categories and make sure everything is included;
• Actual and forecast sales by month, quarter, and year to predict revenue growth (don’t just guess, talk to your sales team);
• Liabilities and Assets to calculate repayments, depreciation and ensure clarity;
• Superannuation and tax obligations for peace of mind and cashflow purposes;
• Anticipated equipment and system upgrades;
• Business vision and plan for the year including expansion and goals;
• Input from key players (staff and department heads) because if you deliver a budget that ignores reality it WILL end up in a drawer.
Step #4: Make Your Budget Honest As Well As Ambitious
You want your business to grow, but if you have been achieving 10% growth over the past 5 years and you are budgeting for 50% growth this year the reality of that needs to be reflected in your business. What activities and expenses do you have to add to achieve that level of transformation? 50% growth could well be achievable if you make appropriate changes to your business, but this must be reflected in your budget otherwise you will undermine your likelihood of success.
Step #5: Focus On The Drivers of Growth in Your Business
Your budget needs to include items such as stationery, software, and equipment but if you consider these expenses in the context of growth and income generation it is far more effective. It’s easy to get distracted by these numbers and miss the opportunity. For example, let’s say one of your business goals is to increase sales by 30%. You’ve discussed this with the sales team and determined that you need an extra staff member (which means an extra laptop, upgrading your software licence from a 0-5 person licence to a 5-10 person license as well as their salary and benefits package). All of those items need to be in your budget, but they are offset against your goal of increasing sales by 30% – which is all about business growth, not simply about the items themselves.
When your budget focuses on the drivers of growth then it has greater relevance and impact. You’ll actually have a few different aspects of your budget including:
• Sales and income forecasts
• Inventory and transport costs
• Labour costs
• Tax & superannuation
Step #6: Schedule Time to Review and Update Your Budget Regularly
Your budget should include month-by-month figures, quarterly figures, and annual figures as well as a reference to your 3- or 5-year business plan. Since it is a working document you will refer to it regularly, but you should also plan to sit down and compare actual and budget figures at least monthly. This means you can update your budget if needed, and it may also show gaps in your forecast. It’s amazing how often this exercise drives even greater growth and how many businesses find they are exceeding their own goals!
If you are doing better than your budget over a period, it’s time to revisit your business plan and revise your estimates upward to reflect the new reality. If you’re struggling, this budget review will usually help you identify what you need to work on.
Step #7: Automate & Iterate Your Budget
You probably already have the tools you need to automate this process and make it simpler. Automation tools include:
• Data management software
• CRM software
• Workflow software
• Project management tools
• Financial software
Most organisations are only using a fraction of the capacity of the tools they already own and it’s worth investing some time in mastering them because they really do make budgeting and business planning easier. When revising your budget it just a matter of changing the percentage sales growth or $-figure in one field and then seeing all the other relevant figures magically update to reflect the change. Your resistance to revisiting your budget melts away.
While the whole process is fresh in your mind, think about what challenges you faced in preparing this budget and what you could do (or what resources you need) to overcome these challenges. If you do this now, you’ll approach your next budget with even greater confidence and the process will get easier and easier over time.
That’s it! 7 simple steps to a powerful budget that will help your business grow faster and make your life and decision-making easier.
Cloud CFO provides customised CFO and accounting services to small and medium businesses who want to outsource some or all of their financial management.