Why Every Growing Business Needs a Realistic Budget

Why Every Growing Business Needs a Realistic Budget

“When it comes to money and so many other things in life, understanding your weaknesses and strengths can help you with your future plans.” Tagene Brown-McBean

Last week the Federal and State Governments of Australia handed down their budgets. We all recognise the importance of these budgets, because we recognise that specific policies and line items will impact our lives and businesses and affect our decisions. It’s easy to say that government budgets shape the economy so they matter, but I would argue that your business budget will shape the economy of your business, suppliers, and employees, so it matters just as much.

Do you prepare your business budget with the same care and analysis of the current and forecast situation as the government does? Or do you create a budget reluctantly (if at all), then file it away until someone asks for it? In my previous blog on this topic I wrote about the importance of budgets for raising finance, today I emphasise its role in business growth.

In my view, a carefully prepared budget can and should be one of the most powerful drivers of your business growth. Let’s look at some of the things a budget can do for your business…

You Manage What You Measure
It’s true in every area of life, and it’s critical in business. You need to plan and track far more than just monthly income and expenses.

Your budget helps you keep track of many items that are hidden in your bank accounts, Balance Sheet, and Profit & Loss Statement, such as capital expenditures and depreciation, BAS payments, Payroll and Superannuation and much more, so that you are not confronted with surprise commitments when your bank account is already low.

What Does Your Budget Reveal?
Your budget reveals your commitments and helps you identify cashflow cycles so you can plan ahead and avoid that feeling of panic that occurs when an unexpected payment comes due.

Your budget will also show you the real cost of certain actions and decisions such as deciding to purchase new equipment or real estate, move into larger premises, develop a new product line, or add a staff member.

As you look at the real cost of any of these actions (or a hundred other options) against the bigger picture of your entire business you will be able to assess the opportunity cost of taking action or refraining in context and make considered decisions quickly and easily because you have all the information in one place.

Business Growth is the Result of Deliberate Action
One of the marvels of modern technology is the ability to use software to quickly explore the effects of different business actions on your bottom-line.

Many business owners struggle to decide what action will be the highest driver of growth. Once you have a comprehensive budget there are many programs you can use to explore the impact on profitability of changing specific markers to decide which drive the greatest growth and you can model the effects of:-
• Increasing item price
• Increasing volume of sales
• Changing your advertising spend
• Changes in cost-of-goods-sold
• Adding / subtracting employees
• Changing cost of delivery …
What is more, using one of these programs enables you to update your budget estimates as these line items change, monitor the effect on your bottom-line, and make informed and appropriate decisions easily.

Knowing What to Expect Relieves Stress and Makes Your Business More Resilient
We would all like to see a healthy positive gap between expenses and income every month even when we take into account capital investments and cycles of business. The reality is that your budget may not look exactly how you hope it will look each month or even each year. Sometimes there might be an unpleasant negative gap between payments due and expected income for a given month.

The point is that an accurate budget will show you this in advance and you can take steps to ensure that it doesn’t cause you to default on payment. I’m not saying that knowing how bad things look will make you feel better, but the knowledge will certainly enable you to make better decisions.

That might mean that you need to take your budget to the bank and arrange for temporary finance, it might mean delaying investment in a new product, or letting your stock levels diminish slightly. It might mean acknowledging that you need more capital available to fund your business growth.

The point is not that a budget will eliminate all your anxiety about cashflow; the point is that when you have a budget cashflow difficulties will not take you by surprise… and the element of surprise is one of the biggest causes of stress in matters of finance.

Since budgeting and planning are such powerful drivers of business growth, why do so many businesses avoid them? I believe it’s because they haven’t really grasped the significance of budgeting as a decision-making tool on a day-to-day basis, and as an objective measure of performance. If that sounds like you, then maybe it’s time to take another look at your budget.

Cloud CFO provides customised CFO and accounting services to small and medium businesses who want to outsource some or all of their financial management.

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