Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.
A budget also forms part of a much bigger financial mastery requirement in your business that should include:
I. Budget (including Break even and Profit Break even analysis)
II. Cash flow forecast
III. Monthly Management Accounts
IV. Financial Statements: Income Statement and Balance Sheet
Why is Budgeting so Important?
Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
Getting to Profit Break even
A good budget must include a Profit Break even. So to get to your Profit Break even you need to do the normal break even analysis, but add in your expected and budgeted Profit. The normal break even analysis, whilst good at keeping the wolves from the door, is not sufficient from a budgeting and planning perspective. Every single one of us is in business to make a profit – and this needs to be budgeted for. Whether you use a % of sales as a budgeted profit target or a ROI (Return on Investment) calculation is up to you.
If you’re not budgeting for profit you will never make any, and secondly, you could just as well sell up and move your investment to an investment company. They’ll happily give you a return between 10% and 20%, and therefore your business should at least be doing the same! The Profit Break even is then translated into the KPIs for yourself and your staff…and only when exceeding these do we even think about sharing the spoils.
A good budget should include your profit target, you’re as well as your staff’s annual increases, commissions, a reasonable allowance for an increase in expenses, provision for non-payment or bad debts and yes, even the good old taxman’s portion!
My advice is to start afresh when creating a new budget. Start with a ‘wish list’ for your business. Enter the salaries and expenses as you would like them to be. First put in the ‘new’ thinking before referencing past performance to see where adjustments would be required. Too often, we allow the failures of the past to dictate the budget of the future. This makes us more conservative and stints our potential growth.
The balancing act is then required between the future aspirations and past performance in line with what you can extract from the business and the market in the New Year. If you want to be doing ‘new’ things in the New Year, then make sure the budget and associated actions also change. No point in having a budget that no one is ever going to follow or reference. Anything is possible IF it goes hand in hand with the right changes.
Your new budget should then be a living document and not lie idle until the next budget cycle. Constantly revisit the projections and the actual costs and make sure you update where necessary. You might be in a position to be making more money or even less. The quicker you’re able to realize this and respond with an updated budget, the quicker you and your staff can take the necessary actions to ensure you stay ahead of the goals you’ve set. If not, you’ll fall into the trap most people make – whereby it’s easier to downgrade and reduce your goals rather than take corrective action and still achieve the desired outcomes.
With a good budget, the cash flow forecast will then merely manage the timing differences between the projected income and / or expenditure actually realizing in your bank account. Together with the Monthly Management accounts where you’ll analyze the projected versus actual performance, you’ll quickly be on a path to success and a much more profitable and relaxed New Year.
Hope you have enjoyed reading this, do share your thought and queries relating to this. You can also share your challenges relating to your life and business with us and we would like to provide the appropriate solution.
Dr. Dhirendra Gautam, a business doctor and leadership Coach; he empowers people to transform their Life, finance and business and introduce then to the world of financial freedom and fulfillment. For business owners & Cxo’s we offer specialized Business coaching Program Namely; Empower your Business (EYB), Empower your Life (EYL) and Empower your Carrier (EYC). Do visit our website www.dhirendragautam.com to find his wisdom he shares with mankind.