Preparing Your Budget
by Colin Linke on 21/01/10 at 7:03 am
Whenever I talk budgets to my clients I see the fear on their faces. Be it because they don’t want to address the issues, they don’t want to plan for fear of failure or the long held connotations that the process is all too difficult – I really don’t know.
So lets cull that belief right here.
Setting targets is good – it allows you to address issues that need to be addressed.
Too may clients I have – from real estate to legal practices – all have issues that need to be addressed. They don’t go away they just get compounded – so lets look at them and deal with them.
And failure – whilst not a desired outcome – can highlight the fact that changes are needed and force you to address the corrective actions required.
Budget 101
The budget that I have prepared (here) will take you 1 hour – maybe 2. Its not going to solve all of the problems of the world but at the least forces you to predict where you want to be in 12 months.
Now some points that you should consider when preparing your budget.
- When you estimate your revenue – take 25% off. My experience is that people who first start to budget, do so with such optimism that they can just never achieve the outcome. That just puts you in a defeatist attitude and doesn’t let you use the budgets power. If you believe that you can get that magical $1m turnover this year well sorry but unless you have a real plan to get there you will fall short. Be conservative and drop it back to 700 to 800k and make sure you get that.
- Now with your expenses. Look at your profit and loss statement and use these as a starting guide only. Then add an additional 15% as a miscellaneous line. This gives a buffer that can be played with as you go, but also covers things that the P/L can mask**
- Your expenses should be looked at critically and assessments made to ensure that you have the right control over these. Tip: Don’t be tight! A big mistake is looking at an item – say Stationary – and saying ” why the hell did we spend $5,000 last year”. Then you enforce a policy that all stationary purchases must go through you from now on. Be critical of the cost and look at reducing them but you still require the items so make sure that they are available.
Outcomes:
This budget will achieve the following:
- It will set a revenue target that you will benchmark your performance against.
- It will set an expense target that you will monitor and make spending decisions about where your actual results are compared to the budget. As an example if your printing is already at budget then printing a new set of brochures is an issue. Find the cost from another line item – say advertising – and allocate the cost here so that you have the brochures required. Then don’t go over your advertising budget.
- A good budget will show cash flow requirements and allow you to forward plan how you will meet your commitments.
- It will get you focussed on your business and you will work damn hard to meet your expectations.
- You will have a method of evaluating the impact of decisions before making them. And the decisions will have a target that they will need to be met to determine success.
Yes I believe in the budget – but not at the expense of running your business. It is a great tool to allow you to plan where you spend your valuable and finite resources and if used properly gets outcomes. I personally re-forecast the budget whenever there is a significant change in circumstances. It ensure that it is current and vibrant. Make a copy and amend the numbers as required. Then report against both.
But most of all have fun. Look at what you want from your business and set the processes needed to get there.
________________________________________________________________________________________________________________
** Your PL can often be misleading as to what is actually occurring. An example – say that you look at your annual accounting fees and the cost is 12,000 – so $1,000 per month. However you have engaged them to do some monthly management reporting and the cost has risen to $1,800 per month. Your budget will be wrong if you just look at the base average for last year.
