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In good times its easy to become relaxed about Budgets and Profit & Loss Reports because there is plenty of income, but when times get tough it’s important to also look closely at where the money is being spent. I recently went through this exercise in my own business and came up with approximately $250,000 of savings per year. Some savings are tough to make but as a business owner, if you don’t make them, the cost could be coming out of your own pocket.

What are the key benefits businesses can gain from a good budget?
The benefits are

• A budget helps you to determine a break-even number therefore providing a target to aim for each month.
• A regularly reviewed budget enables you to compare against actual performance and quickly identify losses and take remedial action.
• Preparing a budget provides an opportunity to think about what you are going to spend and set limits for the business owner and staff.
• A budget allows you to plan operations and gives those responsible a better handle on things.
• A Budget is required for lending and demonstrates good management.

How should businesses approach budgeting for any transition in business direction?
Growing your business requires financial as well as strategic planning. The first thing is to actually have a budget. Very few small businesses have one. The excuse we often hear is “I don’t know what my income will be, so how can I do a budget?” My answer to this is, what most businesses should know is their expected expenditure.

A Simple Budget

• You start by entering your fixed costs into a spreadsheet with a column for each month of the financial year, plus a total for the whole year. Fixed costs are those that you incur whether you sell anything or not e.g. rent, wages etc.
• List all of your fixed cost items by line, and using the previous year and your expectations for the coming year, enter a monthly figure for each expense item.
• Enter a total formula for each month and the full year of expenses.
• You now know what your break-even point is for each month and the year. Break-even is the amount you need to sell to create neither a profit or loss but a $0 result.
• Now you can enter an estimate of income for each month.
• If there are variable costs such as product purchases or labour, if it’s a service business, enter them just below the income. Variable costs are those that are incurred only when a sale is made.
• Enter a formula deducting the variable costs from the income to give a gross profit figure.
• Now add a final formula at the bottom deducting the fixed costs from the gross profit to get your expected net profit figure.

Once you have done this you have something to aim for and work with. Each month you can replace the budgeted figures with actuals to create a ‘Rolling Budget’ which will tell you what your yearly results will be if you meet budget in the remaining months of the year. This can be a very enlightening exercise and show where you need to focus attention on both income and expenditure.