Prepare a 2012/13 business budget – you’ll thank yourself later

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!


What every small business needs to know about reducing their year-end accounting fees…

It’s that time of year again when we all start to get our records together for tax return preparation (yawn!).  For some small business owners, this can be a pretty costly time of year: forget the tax bill – what about the accountants’ fee!?!

Two things to understand:

1. Despite what you may have been led to believe, accounting (generally) is not rocket science! It is however, a little anal: there are certain checks and processes to follow to ensure your financial accounts are presented correctly; and

2. Accountants charge predominantly on an hourly basis: therefore the longer it takes to tidy up your “electronic shoebox” or “paper shoebox” (gasp!), the higher the corresponding fee will be.

It’s pretty obvious then that if most of these checks and processes are done BEFORE you hand over your records; your accounting fee as a result will be fundamentally less. So what are these checks and processes? Well, here are some top tips:

1. Balance Sheet: For these purposes, without going into the why, getting your Balance Sheet right is arguably the most important part.  Every Balance Sheet item can be supported with some form of supporting documentation to prove the balance, therefore, review every Balance Sheet item for correctness, reconcile it and have a corresponding piece of supporting documentation.  If your accountant can see this has been done, it saves them from being required to do it. 

Take your bank account as an example: your bank account reconciliation should be reviewed and possibly adjusted for any old outstanding transactions, the ending reconciliation balance agreed to the bank statement and the bank statement at balance date attached to the reconciliation.  Done!  The same theory goes for all other Balance Sheet accounts.

2. Assets! Yes they form part of your Balance Sheet but they’re so often allocated incorrectly and can be so time consuming to find and treat correctly that I’ve kept them separate.  Make sure assets to be depreciated are in fact allocated to your correct asset account and not scattered around in office supplies, repairs and maintenance, tool expenses and all the other likely culprits.  Ensure each asset transaction includes a clear description of what it is, so your accountant can easily add it to your depreciation schedule without engaging in back and forth with you.

3. Payroll Expenses: your related payroll accounts (wages, super, payroll tax etc) can all be reconciled to supporting payroll reports and lodged documentation.  If for example you have different wage categories in your chart of accounts, include a reconciliation of them all agreeing to the supporting payroll reports and PAYG Payment Summaries (group certificates).  Reconcile super and payroll tax paid with the corresponding reports and investigate any variances.  Provide the supporting documentation. 

4. Finance contracts – understand the difference between a Hire Purchase, Chattel Mortgage and Lease contract and treat them correctly in your accounts! This is a common mistake, which has multiple knock on effects (read: expensive to correct) on assets, GST, tax treatment etc.

Do yourself a favour and follow these types of review processes on at least a quarterly basis, ideally monthly.  That way “mistakes” are corrected at the time and year-end pressures are alleviated.  By doing this, you’ll also have the added benefit of producing reliable, timely reports that you can then start to review and use to add value to your business through performance management.  If you’d like help in getting these processes right for your business and to get ready for year end, please let me know.