“Congratulations! Today is your day. You’re off to Great Places! You’re off and away! You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose”.  – Dr Seuss

You might be thinking that a Dr Seuss quote is a very odd opening to an article about business and on that you might be right, but Theodor Seuss Geisel certainly had a point that is so often forgotten when we’re in the throes of day-to-day business.  In amidst dealing with customers, negotiating with suppliers, working with staff and that seemingly endless to-do list, it can be easy to forget that we have the power to actively steer our business in the direction of our choice.

This time of year is perfect for budgeting and forecasting activities; both of which are great ways to take control and steer your business in the right direction.

Budgeting

Budgets are essentially a plan for your business, expressed in financial terms, and are generally set for a 12-month period corresponding with your business’ normal reporting period (1 July to 30 June for most Australian businesses).  They combine goals and assumptions to produce a financial map against which actual results can be compared and measured on an ongoing basis, to ensure your business is on track.

Using a budget to continually monitor your business’ performance allows you to pick up on issues earlier on, rather than waiting until the end of the year to realise that you haven’t met your target, by which time it is too late to rectify the problem.  It also allows you to identify positive outcomes, reflect on the reasons for these and consider ways in which you might be able to further develop these strengths, thus capitalising on them earlier on.  This process of proactive planning, monitoring and adjusting in real-time is what gives you the power to consciously steer your business.

It is important to note that there are different types of budgets which serve different purposes:

Profit & Loss Budgets

Profit and loss budgets focus solely on profit, through projection of income and expenses only.

Cash flow budgets

Cash flow budgets are a projection of when cash receipts and payments are likely to occur to ensure your business has sufficient cash flow to continue operating.  While they account for income and expenses, cash flow budgets recognise income and expenses when the cash is actually expected to be received or paid, which means the timing may be significantly different to the profit and loss budget.  Conversely to a profit and loss budget, a cash flow budget also accounts for capital purchases, payments of liabilities, cash in-flows from new funding, and private transactions such as proprietor/director drawings.  For these reasons, cash flow budgets are generally used in conjunction with a profit and loss budget.

The key steps to the budgeting process are:

1. Identify your business’ financial and non-financial goals. The key to successful budgeting is combining your business goals with financial outcomes.  Skipping this step is like trying to get your GPS system to give you directions without telling it where you want to go.
2. Find your starting point. Start with your current financial results as a guide and make changes from there, or start from scratch with fresh estimates of income and outgoings.
3. Identify expected changes to your sales in the budget period. This might include changes in sales patterns, changes to products or services offered by your business, or changes in pricing. Remember, dollar-value sales are a product of quantity and price, so consider both components of this equation.
4. Identify expected changes to your expenditure in the budget period. Consider changes to supply requirements due to sales projections, changes in the supply chain which may affect availability and costing, the flow-on effect of sales projections on other areas of the business such as administration and marketing.

Steps 3 and 4 above are best achieved with input from each of the relevant departments in your business.  It’s all well and good to say that your sales will increase by 20% because you’re launching a new product, but your sales team might tell you that that’s unachievable unless you hire an extra salesperson (which will affect your budgeted wages), and your marketing team might require additional funds to pay for the product launch and new promotional material (affecting your budgeted marketing costs).  Usually, steps 3 and 4 are an iterative process until you find a balance between what you are trying to achieve in sales, and what you have the resources to actually accomplish.

5. Review your budget to ensure it makes sense. Apply the big-picture logic test to make sure you’re not missing anything.  Also a good time to check for formula errors if using a spreadsheet.
6. Enter your profit and loss budget into your accounting software (if possible) so you can track budget vs actual figures as you go. Most modern accounting systems will have a place for you to enter this information. Contact us or your software provider if you require any assistance finding this.
7. Extract clear targets from your budget setting process. As you go through the budget setting process, you are making a huge number of assumptions about sales and outgoings (and the things that impact them). These assumptions can therefore be transformed into clear targets of what needs to be done throughout the year in order to achieve your budgeted results.
8. Communicate new targets with your staff and managers. It may not be wise to share your detailed budget with all your staff, but it’s critical that you actually communicate to them what their new goals are. Make sure your sales team are aware of their new targets and any plans for changes in products/services. Give your purchases team areas to focus on for minimising costs.  Identify efficiency goals for your service staff. Without knowing what you want them to do, your team won’t be able to help you achieve your budgeted results.

Once you have set your budget and communicated your new targets, it’s time to put it all into action and to start monitoring your business’ performance.  Naturally it is important not only to identify when variances occur, but to understand why they have occurred and what they mean for the business.

There are endless reasons why variances occur, most of which can be categorised into the following:

• Changes in quantity (for both sales and purchases);
• Changes in price (for both sales and purchases);
• Changes in the mix of products/services sold; and
• Changes in efficiency (how efficiently / effectively existing resources are being used).

Don’t forget to take into consideration changes in foreign exchange rates if you deal with overseas customers or suppliers.  If your sales/purchases are quoted in US dollars, while the price might not change throughout the year, significant fluctuations in the Australian dollar will affect your actual results.

Key tips for budgeting:

• Always start with a clear picture of your business’ goals.
• Be realistic – there’s no point creating a budget that is un-achievable. Always consider what resources are available to you and how this will impact on your projections.
• Think ahead and consider any trends or future events that may impact sales, supplies, staffing or other aspects of your business so you can account for these in your budget;
• Don’t “set and forget”! Budgets are only useful if you use

Forecasts

Conversely to budgeting, forecasts are more about long-term projections than about setting a plan for the immediate future.  While budgets usually focus on one year, forecasts will often project 3 or 5 years into the future.  They allow you to get an idea of where your business will be in the future, based on certain assumptions, which may help you decide the direction in which you would like to steer your business. The process is very similar to that of budgeting, but generally requires less detailed assumptions as it is a higher level view.

With these great tools at hand, every business has the ability to take hold of the reigns and steer their business towards success.  So, in the great words of Dr Seuss, “You’re off to Great Places! Today is your day! Your mountain is waiting. So…get on your way!” ·

Services Highlight

Not sure where to start?  At Catalyst Financial, we have extensive experience working with businesses on developing budgets and forecasts that are designed around their specific needs and circumstances. Contact us today to find out more.