As I’ve spent the latter part of this week preparing a 2013 budget for a client, I thought I’d share my 7 top tips for preparing a budget with you.
1. Firstly, the most important tip – do a budget! Over the years I’ve had many business owners be less than enthusiastic about the thought of preparing a budget. “But Michelle my business is DIFFERENT”. I can honestly say with my hand on my heart – each of those business owners now considers preparing an annual budget to be vital to their business success, they value it enormously and rely on it to guide their business decisions.
2. Bottom up, top down approach – I do a mix of both. Take a look at the costs of last year and plug those in as a start. Make sure you look to see if there have been any changes or trends – such as increases in prices. This is an ideal time to review your cost structure, become familiar with it and ask questions of the right people in your business if you’re unsure or unhappy about anything. Look at costs that have the potential to be reduced, improved or even removed!
3. The next step is to review sales. Usually taking a good look at the last couple of year’s sales is a good start. Once again take a step back and consider any changes that have taken place and what goals you would like to work towards achieving this year – be optimistic but realistic… if you get what I mean!? 😉 If you’re setting a target to work towards, make sure there’s a chance of it being achieved or else it will be really demotivating to you and your team. If you have regular customers, consider if their buying patterns have changed and factor those in. Also remember to factor in things like increased customers through additional marketing activities and referral systems etc.
4. Profit – is there any? Review the profit result and determine what level of profit you are going to work towards achieving this year. If it’s too low, then you’re going to need to take another look at your sales (assuming your costs are pretty solid). What opportunities are there to improve your sales results? If you can’t see any, consider speaking with key members of your team or advisors.
5. Once you have your budget template in place you can also start to use it for scenario planning. I’ve found this particularly useful when planning for new premises, new equipment purchases, changes to employee levels and different sales strategies. It can also be useful for setting more aggressive sales targets and bonus structures.
6. If you want to take it up another level, consider adding a cashflow forecast to the budget and plan in things like timing of tax payments (boo!) and shareholder dividend payments (woo hoo!). There is enormous value in preparing a cashflow forecast at any time, particularly moreso now as more businesses are experiencing cash flow strains.
7. Now use it! Preparing the budget is the first step and you’re definitely going to get a lot of value just from doing that process. Ideally, start monitoring and reviewing your business performance regularly against the budget. What’s working, what isn’t? What needs to be changed – either in your business or perhaps even the budget?
I challenge you to give it a go! If numbers and the like are not your cup of tea, don’t sweep it under the rug or put it in the “too hard basket”. Get outside help to prepare it with you. You’ll wish you did it sooner!