Many small to medium business owners assume that budgets are something only used by big companies with big accounting departments to make big profits. What many small to medium sized business owners are missing is the real reason why the large companies use budgets every day to grow and manage their business. They’re planning not just WHAT they want to achieve but HOW they are going to achieve it.
The term “budget” implies constraint and limitation – we think of a home budget where weekly grocery spending is limited, we think of an advertising budget where only a certain amount is allowed to be spent annually. Therefore we prefer to think of it as a “profit plan” – because our budget is telling us how we intend to make our profit, whether it is weekly, monthly, quarterly or annually.
The best plans take three forms – a Profit & Loss Budget, a Balance Sheet Budget and a Cashflow Budget. Each has a specific purpose and provides information to business owners about different financial measurements of the business performance. The Profit & Loss Budget provides details of the projected business performance for a given period, the Balance Sheet Budget provides a snapshot of the financial position of the business at a particular point in time and the Cashflow Budget provides details of how the business will manage it’s cashflow during a given period. Each of these are planning tools used to assist the business owner in making better decisions to manage their business.
Building a budget is a process that each business owner should go through in some form. Obviously some businesses will require a more in depth budget than others however the principals for the preparation process remain the same. It starts with reviewing the historical performance of the business, assessing that performance against the remainder of the industry and then applying this knowledge to the business owners understanding of the future of both the business and the industry.
Often the budget process is more critical than the actual budget outcome itself as it takes the business owner down the path of a critical review of the anticipated future performance of the business and provides a number of reference points to measure actual performance against anticipated performance.
The most effective way for business owners to take control of their cashflow is to prepare and regularly review a robust cashflow forecast. The purpose of the forecast is to provide a business owner and manager with a picture of how the business’ cash position will look at a given time in the future. This will help the business owner determine how the business as a whole will look at the same time in the future.
If you are a business owner who really wants to improve the performance of your business in the future a budget is a must.
Need help with your current budget or simply don’t have one? We can help!
Contact the team at McMahon Osborne Group, we have the tools to get you started. Call (03) 9744 7144