Budgets – When, How and Why?

I'm sure you've heard of budgeting but if you operate a small to medium sized business in Australia, chances are you have never gone through the process of setting a budget for the year ahead, or even considered it before. There are many reasons for budgeting and good reason why you will have heard of it and why others having been doing this. It doesn't have to be a difficult, expensive or confusing process, especially if you have a knowledgeable and experienced team working with you. The benefit and value you can see makes it something well worth considering if you're serious about your financial management and improving your business performance. Some of these reasons are:

• Setting Targets - The budget essentially sets SMART(ER) goals, being those that are specific, measurable, attainable, relevant, and are time-related being the months/quarters and year ahead. The management reporting and meetings conducted in the year ahead provide the evaluation and review of your business performance;
• Strategy and Funding - A plan is needed in order to fulfil your strategy and goals. Areas you will be giving attention and improving or expanding in, capital purchases wanted or repairs and renewals, and other such items all need to have a clear way they can all be afforded and achieved;
• Spending Control - To have a guide on spending and the expenses expected for the income earnt helps you gain control of your business finances;
• Setting Priorities - Having the plan for the year ahead in a budget helps you have a clear picture of priorities. The budget can be broken down to provide your team with goals and an understanding of these priorities as they relate to their different areas;
• Setting Profit Margins - Planning your profit allows you to set efficiencies and a target profit to secure the future success of your business. You can work to ensure your margins are achieved and if not, address the reasons these aren't;
• Decision Making - Knowing and monitoring your actual performance against a set budget allows you to take action when it's needed. You can make decisions to adapt to changing circumstances whether you are more or less successful than expected.

In knowing the above reasons and benefits of budgeting, especially at a time where markets are experiencing significant disruption through technology, every business can see value from setting and applying a budget. Even in highly successful Canadian author David Chilton's book, The Wealthy Barber, in the very first lesson the protagonist, a barber with a small barber shop, states his "business budget worked like a charm" and that "to this day, I still do a shop budget once a year. And I still stick to it.".

As David Chilton has suggested, even the smallest of businesses can have a simple and cost-effective budget put in place. Those that manage businesses and think they have a true grasp of financial matters and where things are going without a budget will have all sorts of invalid and poor arguments against setting a formal budget for the year ahead. More than likely, they do not have adequate financial knowledge or experience.

Occasionally, there may arguably bean excuse with some logic like being a sole-operator with stable performance through a firm customer-base, having no growth plans at all, and no plans for any capital expenditure, major purchases not any significant operational changes. If everything else stood still, that can make some sense but unfortunately for someone in that position, others don't stand still and we're in a time where industries are seeing some serious disruption and technology and buyer behaviour is rapidly changing. Having a budget helps you monitor performance more closely and know when changes may be needed. Don't make excuses or be lazy and miss out on the value a budget brings and end up lacking strategy to move forward or a road-map in how you'll successfully operate in the most efficient and effective way.

As businesses in Australia have a set financial year, from 1 July to 30 June, the time for most to consider preparing a budget is the same. As the end of the financial year draws to a close it is good to commence preparations in setting a budget. In June it helps to start the draft, consider what you're planning to do over the next year, what contracts or sales opportunities may be arising and what might be changing. This allows you to start July with a plan outline in place, and then with wrapping up the entries and reconciliations for June you can finalise the coming year's budget, give your team goals and set expectations and include this in your financial reports as targets and for comparison from July onward.

Some software solutions may try to make it sound easy, but without knowing how to put quality information in and what needs adjustment, any budget may prove ineffective or even problematic. For some, this might be managed internally but in most cases knowing both how to set this and then how to put it into effect to reap the rewards it is important to have someone with knowledge and experience in this area.

Next... Budgets - Simple or Complicated?