If you own or operate a small business, your chances of having a financially successful year would be greatly enhanced if you took some time & effort to set your budgets for the coming year.
Budgets give you a picture of what your profit and cash situation will likely be at any point in time over the next twelve months. This not only allows you to plan ahead, but also to take timely corrective action if things aren’t progressing the way you expected.
It is imperative that you carefully manage your cash
The introduction of the GST system with its quarterly BAS payment requirements has made it imperative that people carefully manage their cash. A cash flow budget will highlight points in time where you may be short of cash and possibly not be able to meet your payment obligations. This will allow you to plan ahead knowing that a cash shortage is coming because of (say) cyclical trading conditions.
Budgeting for your income tax obligations is also essential. No point in having a successful year only to find that you haven’t put enough aside to pay your taxes.
Apart from helping meet your obligations, budgets also highlight whether the strategy you’re using is acceptable. Is your charge out or selling prices at the optimum level? Is your cost of sales too high, thus making your profit margin lower than it should be? Perhaps your operating costs are too high or not targeted to the areas that will help grow your business.
It surprises me that so many small businesses don’t bother with preparing annual budgets. Instead of being proactive, they effectively force themselves into survival mode. The only variable they seem to monitor on a regular basis is the balance in the bank account or the takings in the till. This is a certain recipe for disaster, as profits, cash flow and bank balances are entirely different things.
So let’s say that you’re now convinced that preparing budgets is the way to go, what next?
If you do your own books or have an in-house bookkeeper that does them for you, you probably are using software that has budgeting facilities. You can of course enter last year’s actual trading as this year’s budgets, but this needs to be analysed for relevance. The World doesn’t stand still and neither does your business. Will what happened last year repeat itself in the same way this year? Highly unlikely.
Cash flow budgets are a little more complicated especially if you operate on the Accruals basis and you have debtors and creditors. The timing of when your clients pay you, and when you pay your suppliers, have a major impact on your cash flow, as does quarterly GST, PAYG tax, staff super and monthly wages withholding. All these need to be accounted for.
Budget is complete – is that it?
Preparing a budget of course is not the end of the exercise. No point in preparing one and then throwing it in the bottom drawer. What I believe is most beneficial is reviewing it monthly on a line by line basis. Yes, it does sound like overkill but it’s amazing how well you’ll get to know your business when you explore its structures to this extent.
Having good monthly accounts means you can do a valid comparison against that month’s budget. You can then get a picture of what you planned (budgeted) and what you actually did. This allows you to then explain the differences and understand why there was a mismatch.
Maybe your cost of sales are higher than you planned. Did a supplier put up their prices? Has a customer not ordered as much as he normally does last month? Time to investigate and take corrective action. No good working this all out at year’s end when the horse has well and truly bolted.
We can help!
At John R D Tate & Partners we can assist with Budget preparation and regular (monthly or quarterly) analysis of your results against budgets. We are experienced in the process and know how to implement it for you, irrespective of your business. It’s not our job to tell you how to run your business or prospect for new customers, but it is our job to analyse the figures and explain to you what’s going to plan and what’s not.
Finally, while there is a cost by way of our fees for doing this, you will be pleasantly surprised at how inexpensive it is compared to the exorbitant fees that so called Management Consultants will try to charge you.
Whether or not you are an existing client of John R D Tate & Partners, it will not cost you anything to have an initial exploratory discussion about your needs and what we can do. Please feel free to call us on 07 3715 8711 to arrange an initial meeting with either myself or John Tate.
Newman Borg is a Partner at John R D Tate & Partners.
This article is intended as General Advice. You should consult an appropriately qualified professional for any major decisions about your business.