The B Word – Budget
Successful business owners not only set clear budgets and targets for their business, they regularly refer to them, and not just once or twice a year.
Successful owners refer to their targets and budgets at least once a month – they ask:
- Are we on track? Is the budget too slack?
- Should we revise the targets?
Here are 3 reasons why you business needs a budget.
1. Your Budget Defines Your Destination
Are you happy with your business performance?
Are your business goals and targets clear, achievable, and reviewed regularly?
Is your business is just coasting? (is it being left exposed to the different economic conditions we find ourselves in, even though you are trying really hard to capture all the sales you can?)
Then now is a great time to scrutinise your business and write it all down in the form of a workable budget and goals.
Step one is to deep dive into your business and have a look at the numbers
Where is your business currently?
Your management accounts are a good starting point as they will tell you
whats really going on.
Some business owners don’t know what their numbers look like – they have a rose-coloured glasses perception of their business, and stick with it in the face of advice, and seeing the actual numbers can be a bit of a shock.
Other business owners look at their numbers and agree that a program needs to be set.
It should also be noted that, while the numbers are a huge part of the business in determining value, contradictorily, it also lies within the business owners own comprehension and acknowledgement of where the business is, and where you want the business to be.
The numbers are just the guides for the program, to signal to you if anything needs to change.
An objective look at the numbers that describe where your business is right now will take away all the subjectivity, opinions and reasons, which are often excuses, disguised as reasons.
This is the naked truth.
For your business, these hard numbers are sales, variable costs, margins, overheads, and profit.
Then come the hard questions:
- Are you happy this profit?
- Is it worth it for you as the business owner? Or are you dissatisfied?
- What do you want your profit to look like?
And presto! You’ve just described where you want your business to be.
2. Budgeting help you understand the symptoms and the causes of your business
Sales don’t just happen or go up.
Expenses don’t just drop because you want them to. Sales and expenses are a result of other underlying factors.
Put another way, they are symptoms of causes.
The business budgeting process measures the symptoms by asking a series of ‘What leads to this number?’ questions, it also identifies the underlying causes.
Don’t be afraid to uncover these.
For example, underlying factors contributing to a sales figure could include (but not limited to):
- the number of calls made by sales people
- the number of customers walking in,
- the number of appointments in your appointment diary
- the percentage of conversions of enquiries or walk-ins to sales,
- the dollar value of the average transaction
- where your marketing is targeted.
These are all called drivers. Sales are simply a result of these drivers – these actions drive sales. Expenses are the same.
For example, rent may be a result of storage for stock. Wages expense may be blowing out because of overtime paid, but the underlying driver may be inefficient staff, a lack of clear processes, or not enough staff.
In reality, it wasn’t the sale or expense that came first, it was their underlying drivers.
The budgeting process forces you to name and to measure these underlying drivers.
Why?
Identifying and understanding the drivers helps you understand how to control them, and focus on improving them.
This is what will improve your business results and get you closer to your goals and targets.
Take the lesson onboard on how it was achieved/ the drivers that lead to the slump and move on in the direction you want to go in.
The key point is to have a direction.
And being a business owner puts you in a unique position – you choose your direction, and with careful planning and management, you can reach your destination.
The detail is in the preparation – just like all great recipes.
You will enjoy how effectively the budgeting and planning process will get you on track towards your goals.
3. Budgeting is about being accountable, not accounting
Once you understand the drivers that create your business’s results, the next question is simply:
What are you going to do about it?
What’s next?
Your budget won’t only give you a monthly sales target, for example, it will help you measure the drivers that will produce that result.
Lets look at this example…
If next month’s sales target is $12,000 – this figure is not your focus on a day-to-day basis.
What is the focus is knowing the underlying drivers.
Ask yourself – what will get me to the $12,000 figure for the month?
Break it down – what will get my business the $12,000 I know we can achieve?
- 15 calls per day (Driver No.1)
- A conversion rate of 70% or more (Driver No.2), with
- Each customer buying an average of $300 worth of products – upsell (Driver No. 3).
Now you and your employees are clear on what needs to happen to achieve the results and all are 100% accountable.
It’s good for your employees, its’s good for you and importantly its amazing for your business.
Employees in business want a clear scoreboard and a competition so they know whether or not they are winning.
Research has found that a lack of measurement in a job is demotivating to employees – they lose focus, job satisfaction and cant see the bigger picture.
Knowing these drivers, and measuring a target for each employee, you can then ask questions like:
- Have you made your 15 calls today?
- If not, why not? Is the target realistic?
- Does the employee need training?
- Do they need better telephone equipment or software?
- Do they need more focus?
- Do they need guidance on what their job priorities should be?
- Or a combination of these?
- Are we being effective and converting 70% of the calls?
- If not, why not?
You then have the information you ned to decide, do we need to improve skills, or system, or attitude, or all of the above.
The power of a budget is in the process of preparing it, as the budget itself is a tool to hold you and your employees accountable to the measurable indicators you’ve chosen.
Successful business owners see a budget and understand that ‘budget’ has a very different meaning.
Put another way – to run a business without a budget is like trying to assemble any flat pack blindfolded and one arm tied behind your back.
An added layer of accountability is us – Murray Dean Accountants.
We work side by side with our clients on a weekly, monthly or quarterly basis as an advisor and impartial associate to ask you, the busines owner, the hard questions about key business drivers and results.
We ask the questions that gently push which will lead you to the result you want.
We track your monthly financial results against your budget, highlight areas of concern and discuss improvement strategies to keep you and your business on course.
Download our eBook ‘The Complete Guide: Making the Most Out of Your Accountant”
