The Art and Science of Budgeting

One of the biggest challenges in any business is the management of cashflow.  In fact, the two most common complaints I hear of are cashflow and marketing.

Cashflow is, however, purely a symptom within a business – and it’s wise to consider the causes.  Often, one of the major causes is the lack of budgeting entirely – or just poor budgeting.

Besides the usual definitions of the word ‘budget’, one of my favourites is:

“The amount of money needed or available for a purpose.”

A budget also forms part of a much bigger financial mastery requirement in your business that should include:

1. Budget (including Breakeven and Profit Breakeven analysis)
2. Cashflow forecast
3. Monthly Management Accounts
4. Financial Statements: Income Statement and Balance Sheet

The combination of a budget, together with a cashflow forecast, that takes into account your profit breakeven, can be the start of many more restful nights (instead of lying awake worrying about the lack of cashflow).  Monthly management accounts also allow you to cross-reference the budget and cashflow to ascertain the overlap or discrepancy between the budgeted projections and the actual results.

Getting to Profit Breakeven.

A good budget must include a Profit Breakeven.  So to get to your Profit Breakeven you need to do the normal breakeven analysis, but add in your expected and budgeted Profit.  The normal breakeven analysis, whilst good at keeping the wolves from the door, is not sufficient from a budgeting and planning perspective.  Every single one of us is in business to make a profit – and this needs to be budgeted for.  Whether you use a % of sales as a budgeted profit target or a ROI (Return on Investment) calculation is up to you.

If you’re not budgeting for profit you will never make any, and secondly, you could just as well sell up and move your investment to an investment company.  They’ll happily give you a return between 10% and 20%, and therefore your business should at least be doing the same!  The Profit Breakeven is then translated into the KPIs for yourself and your staff…and only when exceeding these do we even think about sharing the spoils.

A good budget should include your profit target, your as well as your staff’s annual increases, commissions, a reasonable allowance for an increase in expenses, provision for non-payment or bad debts and yes, even the good old taxman’s portion!

Start Afresh

My advice is to start afresh when creating a new budget.  Start with a ‘wish list’ for your business.  Enter the salaries and expenses as you would like them to be.  First put in the ‘new’ thinking before referencing past performance to see where adjustments would be required.  Too often, we allow the failures of the past to dictate the budget of the future.  This makes us more conservative and stints our potential growth.

The balancing act is then required between the future aspirations and past performance in line with what you can extract from the business and the market in the new year.  If you want to be doing ‘new’ things in the new year, then make sure the budget and associated actions also change.  No point in having a budget that no one is ever going to follow or reference.  Anything is possible IF it goes hand in hand with the right changes.

Your new budget should then be a living document and not lie idle until the next budget cycle.  Constantly revisit the projections and the actual costs and make sure you update where necessary.  You might be in a position to be making more money or even less.  The quicker you’re able to realize this and respond with an updated budget, the quicker you and your staff can take the necessary actions to ensure you stay ahead of the goals you’ve set.  If not, you’ll fall into the trap most people make – whereby it’s easier to downgrade and reduce your goals rather than take corrective action and still achieve the desired outcomes.

With a good budget, the cashflow forecast will then merely manage the timing differences between the projected income and / or expenditure actually realizing in your bank account.  Together with the Monthly Management accounts where you’ll analyse the projected versus actual performance, you’ll quickly be on a path to success and a much more profitable and relaxed new year.

Harry Welby-Cooke is the Co-Master Franchisor for ActionCOACH in Southern Africa. The fastest growing and largest business coaching company globally. Harry developed ActionCOACH across South Africa which now boasts 30 franchisees. He is also a certified, leading Business and Executive Coach. He has successfully assisted countless business owners to significantly grow their profits and develop their entrepreneurial skills.

Brad Sugars founded the brand Action International in 1993 when he realized there was a disconnect between business advice and implementation. The answer was Action! Brad Sugars created a business coaching company so that business owners throughout the world can realize their goals in business. Today the company is known as ActionCOACH. To learn more about business, visit Brad Sugars Review blog!