The creation of a new financial year budget is viewed as mandatory by every business owner, right? Wrong. In fact, in my experience, 95% of small businesses neglect to do this key critical task and are essentially ‘flying blind’, working off a copied and pasted budget from 12 months prior and beyond. In many instances they may not even have a budget at all – a scary thought!
I completely appreciate that for small business owners life is extremely busy, and budget setting becomes an onerous job that falls through the cracks or is deemed unnecessary. The reality is that most business owners wear several hats when starting a business, and it’s hard to do it all when driving new leads is the number one priority. But I can assure you that if you can invest the time to implement a strategic budget and make the effort to effectively manage it once set – you will be ultimately saving your business time and money.
Benefits of strategic budget management.
The perceived pain of creating a fresh annual budget is minor when you consider the benefits you will gain as a result. Medium to large-sized businesses set new budgets every financial year without fail – and perhaps that’s one of the reasons why they’re no longer small businesses, if you catch my drift! So what are the benefits, exactly? There are three key advantages worthy of consideration:
- You will gain insight into how your business performed the previous FY and learn what needs to happen moving forward to help your business to achieve its objectives.
- By setting a budget before a new FY you’re indirectly forcing yourself to incorporate a good business practice of strategising on every aspect of your business including marketing, wages, sales projection and advertising.
- You will have greater clarity into your revenue. Revenue is indirectly linked to all advertising, marketing and promotional strategies adopted but these areas are often ignored. An effective budget and linked strategy will make it so much easier to see which areas of your business contribute to your revenue – and thus guide you with forward planning.
Steps to get you started.
Medium to large organisations will typically employ dedicated teams to manage their strategic planning and financials, with multiple budgets in place based on different scenarios. On the other hand, many small businesses may not have a budget at all – let alone several – which therein lies the reason for their stagnated growth, or worse their untimely closure.
But even the most basic of budgets can be highly effective and useful – particularly when reviewed and adjusted on a regular basis. If you can follow these steps, I firmly believe you will be well on your way to improving the performance and long-term viability of your business.
- Adjust your thinking. Consider your budget as less of a record of ingoings and outgoings and more of a strategic tool to guide your FY planning. Yes, managing costs is critical but this should be the end result of the strategies you decide on before the new FY starts – as opposed to the sole reason for having a budget.
- Download any historical budgets and last year’s actuals and run a strategy workshop with other owners or key decision-makers within your business. If you’re a sole trader, consider engaging any financial advisors or coaches you may be connected with, or hire a virtual CFO [link to Contact page] to assist you with the process. This workshop is imperative for effective business planning and should be a mandatory exercise before heading into a new financial year.
- Obtain best estimate quotes detailing costs and when invoices will be due. Be strategic about what you’re doing and when, as this may impact how much things will cost. Will you be moving offices? Are you planning on seasonal advertising campaigns? Look at major costs and plan properly.
- Become familiar with terminology, industry/government announcements and invest in your own education. Understand the differences between fixed and variable interest rates, know how to manage variable costs effectively and what is actually ‘your’ money or the government’s. Knowledge is power and the more you know the more in control you will be.
- Arrange a monthly review to compare your actual results against what was budgeted. Analyse why your budget was underspent or exceeded, or in the best case scenario met. These regular checks and balances will inform you if your planning setup has been a success or failure, and if you need to change course or strategies.
Once your budget is in place – and after you’ve breathed a heavy sigh of relief! – you can relax in the knowledge that your business has a solid strategy in place based on your business’ targets and objectives. But this should never not be a set and forget exercise; a monthly review should be the bare minimum, so make budget tracking your new hobby and you will avoid any scary surprises. In fact, you should discover plenty of pleasant surprises, too!
Always remember that the financial impact of the strategies and plans for a new FY will indirectly influence you to think how you’ll be growing your business. And wouldn’t that be a fantastic mindset to have going into a new financial year?
If you’d like to receive further advice around budget planning for businesses please feel free to get in touch. The Perth-based Knight BPO team are specialists in Virtual CFO services and are highly skilled at supporting small businesses and sole traders with their financial planning and management.