Using a budget within your business can make a real difference to its success.
- But how?
- Why do you need one and where do you start?
- What should you think about?
- How do you report on actual figures versus budget, and what happens if there are differences?
It’s all in this two episode series, starting this week…
Hi, Happy New Year and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and to help your business grow.
It’s that time of year when we’re all thinking about looking forwards and setting resolutions and goals, and then slowly, slowly or maybe not quite so slowly, they fall by the wayside.
So in this episode, I wanted to talk about budgets because they equate quite nicely to goals, and why setting budgets and working with them over the coming year can make a huge difference within your business.
A solid budget should prove that your plans in the business will work.
- This could be to ensure that you’re able to draw the personal money out of the business that you want to be able to do the things that you want to be able to do in the next 12 months.
- It could be to ensure that you can afford to take on new members of the team to develop the business and to expand.
- It could be to ensure that you can afford any enhanced marketing activity before the increase in income actually shows in the bank account.
So where do you start, because it can be quite daunting.
You need to look at the business now really and make sure that you understand how the business works.
So firstly, review the current spending that you’re doing.
- Has it all been worthwhile?
- Do you have any software that you don’t use?
- Do you have any subscriptions that you’re not making use of?
- Are all of your marketing expenses justifiable, based on the returns and the enquiries that they’re bringing in?
- What’s working really well that you could be spending more on to bring more leads in?
I mentioned earlier that you need to make sure that you understand the business, and by that I meant making sure that you know where your enquiries are coming from.
So for example, if pay-per-click is working really well for you and bringing you lots of leads that convert, you might want to actually increase the amount that you’re spending here and take that into account in your budget.
In an industry like ours, professional services, you need to also know what associated costs you’ll have that will increase if you want to increase sales by, say, £5,000 per month.
Knowing how your business works will tell you where you’re limited and where your ceilings may be, as well so it gives you a chance to think about how you can overcome those if you choose to.
You also need to give some thought to how productive your team members are if you’re looking at expansion and consider whether you’re going to be able to find another one of Sally or Sarah. Some people are stars and they can be very difficult to find in the marketplace, so bear that in mind when you’re working at how many people you need to get through to increase a workload.
Understand your competition here, too.
Do you offer a unique element to your service or product that you could charge a premium for? It may not be that you offer more, just that you perhaps turn around an offer far faster than your competition, for example.
Once you’ve done your thinking, you need to think about what type of budget you’re actually going to work on, because there are actually two different types;you can do a ‘top down’ budget or a ‘bottom up’ budget.
A top down budget starts with sales and bottom up starts with profit.
Generally, we would use both types because they sense check each other and make sure you’ve got the right budget in place. So a top down budget is where you start with at the moment, and if you increase sales by 10%, profit then takes care of itself. But you need to consider the necessary resulting changes across the business, which could mean that you need to make, say, 40% more calls to get 20% more meetings, to get 10% more business.
With a bottom up budget, you need to work out what level of additional profits you’d like, for example, to fund particular goals. So it could be that you want to take more or you need to invest in the business, and you need to make that cash. It’s much more ethereal, this type of budget, and with a blank sheet as the starting point, which is why we’d always recommend working top down afterwards, to make sure that any increase in sales you come up with is actually feasible, particularly when compared to this year’s results.
It may not be realistic to actually come to the end result that you think you might be able to. There are some areas that are really important when you’re designing a budget.
Firstly, sales. It’s really good to get this as accurate as possible, because this is what’s going to actually generate your cash! You also need to understand your fixed and variable costs in the business. Fixed costs are things like rent, rates, insurance, and salaries, excluding commissions. As the name suggests, there’s a set cost, regardless of the volume of sales that you make.
Whereas variable costs are the costs that, unsurprisingly, vary with how many widgets you might sell. They’re effectively everything that’s left after the fixed costs.
So things to think about here are things like the type of customer you might be looking for. So for example, some services or products may be more profitable for different customers. For example, if they’re more local, there could be less travel time involved to factor into any calculations. Make sure you understand what variable it is that changes with the cost.
Once you’ve got a budget, make sure that you use it!
It’s not just a one off and bung it in a drawer. The time you spent preparing it is wasted if you don’t refer to it again during the year. What you should be trying to do is report against that budget every month, which is really easy if you’re using Xero or QuickBooks, for example.
All you need to do is use the in-built template to upload your budget into the system and then you can just run a monthly P&L against budget, as long as your bookkeeping’s up to date. Even if you only add last year’s figures from your accounts into the system as a budget, you’ll be able to see throughout the year how this year is comparing to last.
If your figures are wildly different to those that you’ve budgeted for, you can investigate why that’s happened and you can start to make decisions about what to do as a result. You can look at whether it’s feasible to roll the missing sales figures into future months, for example.
Will seasonality kick in and help that or will actually that makes it worse if your slow season rolls in?
If your circumstances have significantly changed since you designed the budget, you might want to re-budget, but only if you’ve got a definite reason for doing so.
Not making budget isn’t enough of a reason!
Bear in mind, though, that budgeting is a learning curve like anything else, so the first time you do it, you’re potentially going to be guessing a little bit and you’re bound to set levels that aren’t quite right. Just make sure that you keep note of what changes and where you got things a little bit wrong that you can come back to next time around.
There are a range of areas to look at when you’re reporting against the budgets, but rather than try and cover that of all in one episode, I’ll do that next week.
So hopefully in the meantime, you’ll have the time to think about your budget for the coming year.
As ever, if you’d like to have a chat about budgeting, about getting them into your software, or even just getting last year’s numbers in set up as a starting point, please do get in touch.
We’d love to help you get underway with budgets because you can really start to see once they’re in there, you can start to see the real benefits of them.
So I’ll leave you with that and I’ll see you all very soon.