I work with a lot of SME type businesses, but, I have also worked with large corporate’s and listed entities during my career. A significant difference I’ve noticed between the entity types is the amount of planning that goes into the business budgets of the respective businesses.
The opportunities and challenges of the various entity types is unique, however in most cases, the difference in planning is fundamental to the difference in financial success of each entity type.
Benefits
I often tell attendees at our seminars that you cannot hope to achieve financial success if you don’t have a target. It is a bit like playing darts without the dart board. The benefits of a good budget:
- Provides clarity of your financial goals;
- Allows you to measure your performance against your plan;
- Enables you to make strategic decisions based on your future position;
- Gives you the insight to take corrective steps if you are deviating from budget;
- Gives you the opportunity to share the plan with team members so that they understand the expectations you have of them.
Case study
A cafe owner once told me he was happy with his $100,000 pa profit. It was significantly more than the $80,000 pa he used to make as an employee...
We started discussing budgets, returns on investment, and other details and we calculated that he should actually be earning $100,000 pa return on his investment, plus the $80,000 salary he expects. That's a total of $180,000 pa... He was making $80,000 pa less than this!
Based on this conversation we developed a budget, worked out savings and price increases required to achieve it, and then implemented a review process to support the monitoring of the plan.
In the next financial year he achieved over $210,000 in profit...
Are you planning to fail?
If you do not have a financial budget for your business, you must take action. Failure to plan is planning to fail.
It is not good enough to create a sales forecast and say you have a budget. A budget or financial plan is so much more than that. It will give you the tools to measure your sales performance and also the costs and other elements that go into your financial performance.
Ultimately, your business relies on you for stewardship and leadership and you need to ensure that you give yourself and your business the best chance of success.
If you want assistance with planning for your business success, take the first step and contact us for any support that you need…
budgeting process
The only way to comprehensively budget is to draw up a 3 way forecast. This is a simultaneous forecast of your profit & loss, balance sheet, and cash flow statements.This ensures that you are taking into account all the financial variables in your business and reduces the risk of you overlooking key elements.
Once you have developed and tested your key assumptions you can create the budget model and review any potential issues that arise from your projections.
Once the budget has been approved it is now up to you to operationally take the appropriate steps to implement the budget. This may include providing guidance to employees on your expectations on them to achieve their part.
Once the budget has been implemented I recommend a system of review to provide support and to keep you accountable. Depending on needs and circumstances I typically schedule a monthly or quarterly review meeting which is run similar to the board meeting in a larger corporate. Based on feedback I have received, the accountability from these meetings has been a key contributor for the success of many clients that have implemented these reviews.
Case study
A manufacturer had a brilliant product, had done all sorts of work on market needs, competition and costings. On the face of it he had done everything to ensure the success of his new business.
However, when we started working through the plans with him it became apparent that he had not considered the timing of certain events. He had based everything on the profit he would make.
Once we considered the fact that he had to pay up front for raw material from overseas, manufacture, and then wait 45 days for payment after delivery, we calculated that he had a business cycle of almost 5 months.
That meant that he needed several million to fund the business cycle and he was not in a position to obtain funding from the banks for his fledgling business.
Although this finding was a severe blow to the business owners excitement over starting his new business, it ended up a happy story as he started out small, funding the business himself, and after 18 months he was able to secure finance through the consistent good results.
Unfortunately, all too often, we see this issue arise with owners that have not adequately planned and often it ends with the business ending up with the liquidators and the owner dealing with all sorts of stress.
Coaching
Once the budget has been implemented I recommend a system of review to provide you with support and to keep you accountable.
Depending on needs and circumstances I typically schedule a monthly or quarterly review meeting which is run similar to the board meeting in a larger corporate.
Based on feedback I have received, the accountability from these meetings has been a key contributor for the success of many clients that have implemented these reviews.