One of the services we offer is financial and accounts support to our clients. This ranges from bookkeeping, to end of month reporting, to strategic financing of businesses, budgeting, free cash flow analysis through to helping businesses simply tighten up their accounts and enjoy better financial performance. Despite many of our clients, both big and small businesses, running financially intricate operations, not everyone has a budget.
To those reading this who gasp in shock, us too. To those who are reading this thinking that you fall into that category of not budgeting, you should read on and find out exactly why a budget can be the most valuable part of growing and managing your business for success.
Budgets get everyone on the same page – unanimous understanding
Sharing budgets openly with your team can enable a unanimous understanding amongst team members. I’m not suggesting that every component of the budget be made available for employee viewing, but rather the key figures be shared to provide a blueprint for the team to align their individual actions with. It is a great way to involve the input of the team, whilst also highlighting the strategic direction of the company and ensuring results driven accountability.
Plan for future growth – ensures capital on hand when needed
Effective budgeting can be used as a ‘saving’ mechanism for future company growth opportunities. When a strict budget is implemented, it is important that cost savings are allocated for future investment and business expansion activities. By factoring this in, these amounts can be pooled together in a designated reserve account to ensure there is a stable and healthy portion of capital for future business growth. Further, this cash pool can be used on those ‘rainy days’ where a company needs a little bit of extra cash to pay for its day-to-day expenses to stay afloat.
Recently, I had a client working on a considerably sized project for one of their customers. The client said they hadn’t prepared a project budget as the sheer size of the project carried so much profit. This attitude resulted in the project input growing to over one and a half times the expected input for a similar task, and although a profit was still being made, the profit margins were significantly diminished. If a project budget were prepared, appropriate measures could have been implemented earlier to more effectively manage the use of time inputs and ensure profitability. This would keep the project expenses aligned with the target profit margin of the project.
Get your pricing right
Budgets are a unique tool that can be harnessed to successfully develop appropriate pricing models. They outline where the majority of the costs are taken up in providing goods or services which can promote more efficient cost management. For example, imagine you are a retailer and have just reviewed a budget for a certain product. You notice that the delivery costs are quite extravagant which prompts you to choose cheaper alternatives to the current courier. This would decrease the current break-even of that product, allowing for a more attractive pricing structure to be implemented.
Budgets keep you honest
As a business owner, it is easy to blame external factors such as the market or the specific industry you operate in for poor business performance. This mindset of avoidance in itself can be detrimental to your company. By implementing companywide budgets for both quarterly and yearly periods, there is a constant measuring stick assessing the success of the current business operations. Failing to align with budgeted figures could both indicate that optimisation is required and help identify where it is required. On the other hand, smashing these budgets could suggest that perhaps you are too cautious with your estimated figures and that you should strive for greater heights. Either way, it is a simple tool that can measure how successful your company is relative to its context.
So, please don’t be daft. Create a budget and use it as the powerful tool it is. Get more visibility of your business, get your team on track, ensure profitability and sustainable growth – is it possible to be more successful as a business owner than that?