When is the last time you made a major purchase? It may have been a house or car, caravan or boat. Whatever it was, unless you were in the fortunate position of having a large sum of disposable cash you probably thought about how you were going to afford to pay for it. Perhaps you used some savings, released some equity from your property, or took out a loan. Whatever method you used, you probably thought about what impact it was going to have on your future financial plans.
Whether you explicitly thought about it as budgeting, in reality that was what you were doing. You were making a decision about where to allocate your finite financial resources, be they income, borrowings or savings. How you made that decision may have been based on all sorts of factors – the need for a larger property for a growing family, the status symbol of a new car, the pleasure of weekend breaks in your new caravan, or the love of life on the open seas!
If you are a business owner, do you give the same level of forethought and financial planning to your business? If not, why not? Many business owners I speak to don’t see the relevance of a budget for their businesses. They give a variety of reasons as to why they don’t budget.
“My business is too small.”
“It’s too hard to predict sales.”
“I have cash in the bank so I don’t need one.”
“My sales and costs will be about the same as last year.”
“I don’t see the benefit.”
“I’m not a numbers person.”
However, if you don’t budget you are failing to use an opportunity to make considered decisions about how you are going to use scare resources. Ultimately, your budget is your business plan stated in financial terms.
And, if you don’t have a plan, then how do you know you are taking your business in the right direction? It’s like driving to a new place without a map. You might not get there at all, and even if you do, it may take a lot longer than necessary. But if you had a map, you would be able to check that you were on the right path when you went past landmarks on the way. If you found yourself off course, then you could correct your direction, without wasting too much time.
The first thing is to write out some targets for your business. These don’t need to be financial but often there will be at least one that is related to money. I’m sure you have heard the acronym SMART in relation to goals. To recap, make your goals, Specific, Measurable, Achievable, Reaslistic and Time based. A goal of an increase in sales would not be a SMART goal, but an increase in sales by 10% within the next 12 months would be.
Just going through the process of writing out your targets will make you think about your business and what you want to achieve from it. Think about why you went into business in the first place and if it is delivering you the lifestyle and rewards that you thought it would. If not, then perhaps you need to think about doing things differently.
Then you can start to create your budget. Your budget is nothing more than a set of landmark financial targets to help keep you on course towards your goals. If you are the only person in the business, then the targets are just for you. If you work with a team, then sharing the budget can be a great way to get the buy in of your team. They are also a valuable source of feedback – are you being too cautious; are your targets unrealistic; can you meet targets with current resources or will you need extra ones?
What should you be budgeting?
Ideally, you should prepare a profit and loss budget, balance sheet budget and cash flow budget. We’ll look at each of these in turn in our following blogposts throughout the month. Feel free to subscribe to our Business Bitesize resources for more information on business planning and development.
Alternatively for more information don’t hesitate to contact us on 0131 220 0152