When it comes to business budgets, clients often fall into one of two groups. Those who understand the benefits of proactively managing expectations and planning for growth. Or those who run for the hills when we mention preparing a budget.
Budgets are a smart, strategic way to plan for the future of your business. Budgeting can help to:
- identify upcoming expenses,
- plan for investments and
- understand where your money is going.
Some clients find budgeting overwhelming or are concerned that they will be ‘tied in’ to their spending. They worry about a budget reducing their flexibility, however, the opposite is usually true. You can start a business budget by using a simple template, identifying the larger expenses you know will be incurred in your business, then review reporting, such as a profit and loss statement, to review all line items of expenses.
Simply completing this process can help business owners identify areas of spending they might usually overlook, like unused subscriptions or memberships. It can pay to identify which expenses are critical to running your business, and which are simply ‘nice to have’. In some cases, these expenses may need to be managed, if cash flow is an issue. Often, it’s simply being aware that they are there and providing the value you expected.
Once you have identified these fixed and variable expenses, you can build a picture of the volume of sales needed. It is not unusual for smaller businesses, to simply assume they are making enough to cover ALL their expenses. However the often don’t incude paying themselves appropriately for their own work. For businesses with a team, understanding the required income to meet budget can also then influence sales targets and incentives. It can also help your team identify other cost-saving measures, or opportunities for increased productivity.
Do you understand what income your business requires in order to break-even, or make a profit? This is where budgeting stands out in the planning of a successful year in business.
On occasion, clients find it difficult to decide how to estimate what their earnings could be for each quarter. COVID-19 showed us that nothing is certain. It’s important to remember that budgets aren’t set in stone. However, without a smart estimation of income, it’s virtually impossible to plan.
A useful practice for any budget is to track and review the difference between the actual and expected results. This is important for both income and expenses. As a business manager, understanding why those variations occurred will help make decision-making much simpler. It will also mean the next budget is easier to prepare.
Changes tend to occur because of unforeseen expenses that ‘appear out of the blue’ or, that sales have risen or dropped. I.e. has a particular area of the business experienced significant growth compared to another area? How can this be leveraged?
Budgets do not have to be created overnight, be perfect, or completed all by yourself. Your accounting team should be able to provide you with the resources and/or time to make this process a valuable investment in your time. It doesn’t need to be a burden that provides no value.
If your business is in need of a budget for the upcoming financial year, give us a call to schedule a time to get started.
At VBA we specialise in strategic tax advice, offering tax and financial reporting for individual income earners, family businesses, tradies and construction companies.
Victor Bimrose Accountancy Pty Ltd (ASIC No. 1259423) ABN 53 010 957 294 is a Corporate Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361.
Mark Foxley-Conolly (ASIC No. 1259421) is a Limited Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361
General Advice Warning: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.