Just as recent Government budgets are being seen as irrelevant so too may business budgets in our rapidly changing world. Not knowing what sales will be in six months does not make budgets irrelevant. Budgets, if used correctly are still a very important planning tool, especially at this time of year.
Useful budgets enable us to determine how we need to manage our costs and determine the revenue we need to be able to achieve the profit and cash flow we need.
Traditional budgeting starts with last year’s figures and increases by a few percent and if you make a profit it will be good enough. I agree that type of budget is irrelevant.
A budget is valuable when it starts from the bottom up. A good budget asks searching questions, such as did you make sufficient profit last year. Recent research shows that a sufficient profit is when net profit, after deducting a fair owners’ wage, is 10% of the gross profit. If it is less than this your business will struggle for cash. If you’re a budgeting to breakeven or even a small profit you will go backwards.
The first place to start to lift your bottom line is with your staff. Your people can have the biggest influence on driving revenue and profits up. They are also your biggest cost. A question to ask is “If you were reemploying everyone on your team, would you enthusiastically rehire each one?”
Focusing on your people should mean you are focusing on productivity Are your people working as effectively and smartly as they can be? If you review the process in each of your various areas with the persons responsible you will be pleasantly surprised at the time savings that can be made by eliminating some tasks or doing them differently to reduce the time they take. This includes the administration as well as the production areas.
Having worked on gaining extra capacity the next step is to look at how you can increase sales. Sales starts first with ways you can gain extra work from your existing clients, as it is easier to sell to them. It may involve taking an existing product and producing a simpler model that is cheaper and will have wider market appeal because of the price.
If further sales are needed to get the required profit then look at how you will gain new customers. To be realistic you will need specific plans on how this will happen. Some of the productivity you free up could be directed to resourcing the sales.
Having done this high level planning you can then prepare a budget that you want to hit and because of the work you have done you know it is realistic and can be attained.
Once prepared it is good to put your budget into your accounting software so that you can do a comparison of the actual results to the budget each month. If you are not hitting the budget you can ask yourself some hard questions and adjust your strategy.
Peter Ambrosiussen is the principal of Ambrosiussen Accountants & Advisors and a certified Gazelles international coach www.ambrosiussen.com.au
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Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 13 July 2013