Utilising Budgeting as a Control Mechanism

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Two things business owners learnt fast over the last couple of years:  one, they cannot always be in control, two, they are certainly much more at the mercy of unexpected challenges than they ever thought.

Control, which is the power to direct or to have influence over something, provides that safe space in which most businesses flourish. We are very much familiar with that powerful and uncomfortable tension between the need for a sense of control and the evidence of inadequate control when things are not going according to plan.

Let’s look at one of these controls we can put in place – budgeting.

Budgeting is the process of creating a plan to spend money, fund current and future commitments and projects, and to determine in advance whether your business will reach its desired goals.

Importance of budgeting

A budget will force you to clearly set out the desired medium to long-term goals of your business – if you have not already done so. A budget will help force you to set out the path to achieve these desired goals. You will be able to track the progress on whether you are achieving these goals. It will help you to keep your eye on the big prize and form the base of cashflow forecasting, so that you do not run out of cash.

A survey by research firm Clutch in 2020 indicated that only 54% of small businesses had an official documented budget for the 2021 financial year, which indicates that almost half of the small businesses surveyed, do not have a plan to reach their desired goals. Joe Biden’s father had the expression “Don’t tell me what you value, show me your budget and I’ll tell you what you value”.

The question is, do you value your business? If there are no control systems in place, planning is irrelevant. If there aren’t any planning in place, it will be a challenge to achieve business objectives and grow.

Here are a few tips on how to approach your budget:

Cloud accounting

The starting block for setting up a new budget is to have a clear view of the actual company performance for the preceding periods. Onboarding cloud-accounting software like Xero will enable you to have a real-time view of the actual performance of the company. This comprehensive information and critical analysis should form the base of your budget, and not simply the ‘Blue Sky’ profit you hope to earn.

Critical overview

Scrutinise your historical revenue performance to identify possible seasonal trends that should be included in the budget. Review your historical expenses with a magnifying glass and get to the bottom of where the money is going. Don’t be afraid to ask the hard question:

  • How easy or difficult was it to derive this revenue?
  • What was the reason for fluctuations from month-to-month and what can be done differently this time?
  • What was the largest expenses that were incurred, and did it derive revenue?
  • What are the monthly recurring costs, and ask yourself if you are not paying too much?
  • What was that big once-off unforeseen expenses that were on top of everyone’s financial challenge list, and should you provide for it this time around?
  • What revenue or expenses kept you up at night?

Future gazing

Project your budget based on all these discoveries and include for strategic investments or expansions so that you have a smartly planned tool to navigate your business on its goal path. It’s important to wear both your ambitious and realistic hat, but don’t underestimate new possibilities.

Don’t forget to review your finances on a monthly basis to ensure that you stay on track. Compare actuals against budgeted figures so that you know exactly what happened. This will enable you to improve and adjust the budget as new information comes to your attention, staying ahead of any unexpected and unwelcome financial surprises.

Gain insights from outside

You certainly do not have to do it alone. A budget is the one thing you can control, especially with a helping hand from an outsourced and objective business advisor, who can assist you all the way from getting your cloud accounting up and running, up until the critical overview and reporting on the budget.

In conclusion, budgeting should not be a restrictive and limiting measure, but rather serve as the measuring tool to evaluate your business goals and performance.

The transparency into your business finances will enable you to easily identify pitfalls in your business with added peace of mind, enabling you to make sound business decisions.

Get in touch with the ASL Business Advisory team to guide you through your business budget.

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