The start of a financial year is a fitting time for business owners to analyse the performance of their business over the past year. Use this as an opportunity to critically see what went well, what didn’t, and what needs to be changed, whether it be big or small or just a slight tweak here and adjustment there.
However, improvements require changes and, unfortunately, most changes have costs associated with them. Whether they be capital, downtime and loss of productivity, training and implementation – you name it – it all adds up. The bigger the changes often the bigger the cost, and hopefully the bigger the reward from efficiencies that will result.
But how can you predict what the costs will be and what the gains should be? How can you be sure that it’s affordable for your business and whether you will get an adequate return on your investment?
Undertaking a major project can be risky, so you want to do everything you can to minimise that risk. You need to fully understand the impacts and the long-term benefits to the business from completing the project.
If the project falls outside of your personal area of expertise, you will need to engage experts. The first thing they will do is properly cost the project, build a project plan and timeline, and a project budget. The project budget needs to be incorporated into your full business budget, and you need to make sure the budget picks up all consequential impacts of the project such as production downtime, restructuring workflows, training and implementation. If you need finance, then your financier is certainly going to want to see this.
Budgets are not just for major projects. Each time a new financial year rolls around, you should be taking the time to review your full budget vs actuals for the past year to identify and explain any variances. This will form a key part in confirming your budget forecast for the next 12 months, including seasonal and other impacts such as Christmas trading/closures.
It is important to consider upside and downside scenarios as part of your analysis. This is extremely relevant in the current economic climate, with the ongoing impacts of covid and the resulting measures implemented globally, such as labour and materials shortages, increased logistics costs, and rising costs of interest, fuel and utilities. For some businesses, these changes are more impactful and can result in business failure, so a good budget will include “what if” scenarios, which pressure test those that could have the most impact.
Make sure you set goals and targets that are challenging but achievable, and that you communicate your goals to everyone relevant in the business. People need to know what they’re aiming for, including you. Don’t forget to set a monitoring and review process for these goals and targets at the same time. This way everyone can stay up to date with the progress being made. More importantly, if negative trends start to appear and you already have your finger on the pulse, you can quickly implement remedial action before it is too late.
At Advivo we encourage all businesses to be rigorous in their annual budget setting and monitoring through our Monthly Service Programs (MSPs). Having no budget is like setting off on a road trip with no GPS, compass, or map. Would you do that?
The benefits of budgeting should never be underestimated when running a business including:
Without a budget, it is impossible for you to know the financial health of your business and whether you have met or exceeded your goals. Monitoring your finances allows you to develop strategies to fix problems before they become major issues as well as to minimise any spending that is not part of the plan.
Having a budget allows you to develop a strategic plan since you will know the answers to questions such as whether your business can expand. Communicating the budget helps everyone in the business understand the priorities of the business.
Obtain debt financing
If a small business looks to obtain debt financing from a bank or other financial institution, it must produce a budget to show potential lenders.
If a business wants to attract investors into their business, those investors likely expect to see a budget before they commit to investing in the business.
A budget assists with the preparation of income, sales and payroll taxes and forecasting what taxes you will have to pay in the future without any ugly surprises.
To make any decision about your business, you have to know how much money is allocated to each facet. Engaging the team in reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.
If you have any questions about preparing or monitoring your business’ budget in the new financial year, please don’t hesitate contact us. We have a talented team of business advisors and accountants who will listen and take a hands-on approach to take your business to the next level.