Advivo Partner, Dale Edwards discusses the importance of having a budget in place to understand the key drivers of your business.
As a business owner, you likely often hear people say that businesses need to have a budget. But budget planning takes a lot of time and mental effort, which you may not have in your busy day-to-day. You may be wondering why you even need one, and the answer to this is simply because you can’t afford to.
Creating a functional budget will give you the insight to identify future business issues, create scope for growth, and solve problems before they happen. By working through the income streams and costs of delivery, staffing, and overhead requirements of your business, your budget can help you to drill down into what is driving each of these numbers.
The benefits of creating a business budget include:
- Understanding what is required to deliver what you sell.
- Understanding the drivers of the business.
- Determining the right staffing requirements of the business and identifying if there are under- or over-staffing issues.
- Reviewing where money is currently being spent and whether what it is being spent on is delivering value or if this is a wasted cost (e.g., services that are no longer being used but still being paid for).
The budget is only one piece of the puzzle though, as it is the equivalent of a Profit & Loss Statement. It does not consider cashflow timing or capital expenditure and financial costs, which are instead included on a balance sheet.
One step further...
To be armed with more sophisticated forecasting information, what a business owner really needs is a 3-Way Forecast, which includes Profit & Loss, Balance Sheet and Cashflow Statement. This insight helps to determine pain points in cash flow, allowing you to put solutions in place well in advance to avoid business failure due to lack of cash flow.
What should you do with a budget or 3-Way Forecast after it’s been prepared (and perhaps sent to a third party who has asked for it)?
Do you:
- Chuck it in the bottom drawer, never to see the light of day again. This will deliver no further value for the business;
- Periodically review projected versus actual business performance to see how well “the plan” is going. This allows for the opportunity to make changes on the fly to improve performance;
- Use it as a base for preparing the budget/3-Way Forecast for the next period, making changes based on what worked, what didn’t work, and what has changed.
A budget can be a powerful tool if used intelligently and with purpose. Without one, you have no real idea of how well your business is tracking towards the targets you have set for it. If you’d like to supercharge your business outcomes and need help with building or reviewing your budget or 3-Way Forecast, please contact us today.
