The importance of a budget

Over 5 years of austerity in Ireland has almost made the term “budget” a dirty word in this country. It is synonymous with cutting back on spending and raising tax but, if used correctly, a budget for your business can be a powerful tool to motivate you, control your costs and channel your energy into the areas of the business that need attention. A budget is not always about controlling spending, in fact I would argue that the most important part of a budget is to forecast your income and set targets that are ambitious but achievable.

It is now November so we have about 6 weeks until a new financial year. If you own a business I would really encourage you to think about putting a budget in place for 2013 over the next few weeks. Most budgets are based on last years actual performance and should be adjusted to take account of any changes in circumstances (more competition, new legislation, once off items etc). It’s important to break the annual budget down in months so it can be monitored throughout the year and to take account of any seasonality in the business. Businesses who take on large projects also need to prepare a budget for each job at the outset, it is vital for the tendering process alone, but I will not deal with this job specific budgeting in this post, this deserves a post all of its own in due course. I want to focus on budgets for the core activity of your business which span an entire year and can be made up of numerous projects throughout that year.

I won’t go into the fine details of how to prepare a budget, a quick google search will tell you that, what I want to focus on is how easy it is to prepare and monitor with the right technology and i want to try and convince SME owners that never prepared a budget before that it is easy and brings great benefits. It goes without saying that a budget only works if you know how your business is actually doing each month and for this you need an accounting package ( see previous post here). Your accounting package should also have a budget function built in, Quick Books and Xero have this. This will allow you to easily bring up your Actual Vs Budget analysis from within your accounting software and drill down into the areas that look like they need attention.

There are many benefits to having a budget and monitoring your performance against it regularly. Foremost is is a way to motivate you to keep pushing for higher sales and lower costs. I often find clients tend to only analyse their figures in relation to last year. This is a good exercise to do but if this is the only analysis it often only leads to business owners being happy if they are marginally better than last year. I try and encourage clients to set ambitious but achievable targets at the start of each year based on new ideas for their business rather than just aiming to do the same things you did last year, only better. This often leads to business owners thinking about their business in a new light and can unearth fresh ideas.

Budgeting is also vital for spotting cost overruns early in the year, there is no point knowing about an overspend at the end of the year when you sit down with your accountant. This can be particularly beneficial for businesses where employees rather that the owner make the purchasing decisions. Budgeting is an objective tool that makes sure costs are kept in check and allows for targets to be clearly communicated and evaluated.

I also recommend to analyse budgeted margins as well and sales / cost figures. Gross margins are vital in sectors such as retail & restaurant trades and these should play an important part in any budget.

Finally I feel that a budget should be kept as simple as possible. I have seen excellent budgets that only focus on Sales, Cost of Sales and Wages and these business owners

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