Would you start a journey in your car not knowing where you’re going and how you’re going to get there? Of course not. It’s the same for your business next year. You need a Plan. A Budget. A route to get your business to where you want it be at the end of 2021 and beyond.
But the fact is many business owners don’t do Budgets. At evirtualFD, we believe having a budget is absolutely essential to your future success. Especially now after what’s happened this year.
If it’s so important, why don’t business owners Budget?
“I’m too busy” or “It’s too complicated,” are common excuses as to why business owners do not budget. But these are some of the benefits enjoyed by those who DO budget
- Budgets are a great tool for accountability and to see at a glance how you’re tracking against your goals.
- Reducing uncertainty and helping you anticipate future cash flow peaks and troughs.
- Proactively identifying and being prepared for challenges and problems.
- Feeling in control of your business and having the ability to handle change.
- Facilitating better and faster decision-making.
- Clear communication of your goals and priorities.
- Ensuring you have enough money for strategic projects and initiatives.
No one has a crystal ball to predict the future, but with a solid budget, owners can prepare for whatever tomorrow brings. It’s a well known fact that if you have a plan and you follow it, you have a much higher chance of success than you would if you had no plan in place at all.
How to Create a Budget
There is no excuse for not having a budget for 2021, you need to find the time to create yours. Get the Right People Involved in the Process, get your accountant or Virtual FD to help if you haven’t a clue where to begin. Here are a few pointers to get you started:
Use the Previous Year’s Figures to Guide Your Budget
Use the previous year actuals to guide your predictions about the future, but don’t just copy them, dig deep into the figures to see if those costs are really needed or whether there is a more cost effective way.
Using your sales history and how robust you expect next year’s sales to be, you can create fairly accurate forecasts. Take into consideration the following:
- The pricing and marketing strategies you use – can you raise your prices?
- Changes in your market and in your competition. (e.g. is price trending down?).
- Changes in your business. (e.g. launching new products; retirement of an old product).
When forecasting revenues, think about cash flow. For instance, how long will it take for customers to pay you? Take a look at our cash flow challenge to improve cash flow in 59 days. Download it here.
What fixed costs do you have? (e.g. rent, mortgage, salaries). What variable costs will you incur? (e.g. supplies, materials, subcontracted labour, utilities). Analyse historical costs records, and then contact key suppliers or vendors for quotes. Do they foresee having to change their prices? How can you prepare for unanticipated price fluctuations? Take a look at our Margin Monsters work book to see how you can improve gross and net margins. Download it here.
Share important information and gather the input of employees or managers who are responsible for major business functions. This will help you achieve a ‘big-picture’ view of your organization, its needs, and areas where you need to invest or cut costs.
Use Your Budget as a Management Tool
Use your budget to help you monitor costs and revenues, particularly as they relate to specific activities. They also provide you with invaluable insight that can help you make more informed, strategic decisions. Two areas to which you want to pay special attention are:
- Actual income. Compare forecasts to actual income each month and conduct an analysis. Is there a shortfall? Why? Were sales lower than thought? Did products not perform as well as you’d expected? Was income higher? This could mean your targets were too low. You can take action where needed and amend the budget going forward to obtain a more accurate version.
- Actual expenditure. What are you spending versus what you thought you’d be spending? Did fixed costs differ from your forecasts? Are variable costs in line?
- Create what if scenarios. Using software you can flex sales, margins and costs to create best case and worse case scenarios, and analyse the impact on profit and cash of investing in more staff for example.
Once you have prepared your budget for 2021, don’t let it collect dust. Check actual against budget to see if your forecasts and the current state of your business align, and if not, reset. Your budget should be an integral part of your monthly or quarterly management reporting pack and meeting.
Budgets may seem intimidating but the fact is they are just too important to neglect or ignore, and remember something is better than nothing. So start crafting yours today.
Not sure where to start? We’ve got you covered. Start by downloading our free Business Health Check Quiz to see how you shape up.
We will be selecting 10 businesses who have downloaded our Quiz to help them craft a budget for 2021, absolutely FREE.