Business budgeting for all seasons
Budgeting can be the difference between success and failure for a small business. Here, we speak with local business owners and advisors for their tips and tricks.
Setting a budget has been an important part of the success for Parcelpoint.
In fact, budgeting has allowed the small business to pick key projects that will have the biggest impact, finance manager, David Agius says.
“At Parcelpoint, we started out with a budget from the outset, because we knew it would really help us to plan and execute all the things we wanted in the future,” he said.
The small business, which offers a growing network of local delivery, pickup and return locations for parcel deliveries, pick-ups or drop off, is thriving.budget
But a budget can only be a guide, especially as a startup business that changes rapidly.
“We’re constantly trying new things, have been experiencing huge growth, onboarding new retail partners and had a recent capital raise,” said Agius.
“Flexibility in the budget allows you to add something that helps you pivot later on. Being a startup, things move super rapidly and the ability to pivot is paramount.”
Why do you need a budget?
Cash flow is one of the biggest challenges facing small business.
But only 60 percent of business owners produce accurate and timely financial reports, according to research by accounting firm Hill Rogers published last year. The research also revealed that only 22 per cent of SMEs know how their business’ key performance indicators compare to industry benchmarks.
Scottish Pacific Finance senior executive Wayne Smith says budgets are great tool for predicting the financial implications of a business plan, provided your assumptions are realistic.
“A meaningful budget shows how delivering on your business plan will impact your cash flow. It should contain forward-looking financial forecasts including profit and loss, balance sheet and cash flow statements,” said Smith.
A budget will also help small business owners understand how to fund the business during growth periods. “Having a business plan and robust financial forecasts in place will help a business owner with any conversations they have with potential financiers.”
What to include:
When creating a business budget, you want to know what the ‘goal posts’ are, such as the final revenue or profit figure that you’re aiming for.
The final profit or revenue figure is like an ‘X’ on a financial map, and the strategies you choose are the pathways you’re going to take to get there, Lynda James, accountant and business analyst from Valo Financial explains.
“Before anything else, cash flow and profitability are the main consideration of a budget. Without either of these working well, a business cannot exist,” said James.
Some business owners find it hard to put a value on their time, or don’t pay themselves a wage.
There are some key differences between service and product-based businesses. Service businesses tend to not charge properly for overhead and support costs.
And the other hand, product-based businesses need adequate cash flow to re-order more stock and to cover associated business costs such as packaging, storage and distribution.
“Knowing how much it costs in goods, labour and associated costs per item is very useful after you’ve done a budget, and this should be a natural progression from the information collated,” she said.
Break it down
Once the budget has been compiled, take a look at the data to understand:
- The average cost per client
- The average cost per product sold
- The average revenue per client/product sold
- What is left over each month after tax
- What the last 12 months reveal about the budget for the year ahead
Segmenting data based on key income streams can help small business owners understand more granular detail about their business, adds accountant Amanda Fisher, who has helped hundreds of businesses under their numbers.
“In MYOB AccountRight it’s easy to do by using the ‘Jobs’ tab for each income stream.
“For a service-based business, segmenting may be separating specific types of services, or by contract if doing larger contract work,” explained Fisher.
For product-based businesses, you can segment by customer location, wholesale, retail or online sales.
“The key is, once these segments are identified, all costs associated with the sales of each segment are also allocated to the ‘Jobs’ tab.
“This allows business owners to clearly see the revenue and costs for each segment, which allows for more accurate budgeting,” said Fisher.
Once you have historical information about the income and expenses for each segment, it’s easier to create a budget by referring trends and using that information for the budget, she added.
It should also be noted that budgeting for each job is a specific feature of more advanced accounting systems like AccountRight, whereas budgeting features in MYOB Essentials only has account budgets (you can read more about Jobs in AccountRight here).
But, bear in mind that a business budget is not just set and forget. You need to regularly compare your actuals against your budget and pivot if things aren’t working and leverage those areas that have been successful.