Many business owners we speak to know that they need to have a budget for their business, but many people don’t know when they should do a budget, how to prepare a budget and why a budget is critical to achieving success.
How often should I do a budget?
We believe that every business should always have a 3-year budget to ensure as the business owner you can see whether the business model is able to operate profitably. While business owners will have different views over the what profit they seek to achieve and whether that represents a suitable return on their investment, a profit is necessary in any event to ensure that the business can pay the suppliers and staff that are required to operate.
Why is a budget so important?
When a budget is prepared, as the owner you are in a much better position to manage and grow your business. A budget that spans a 3 year period also identifies important considerations for the owner as the business grows that may require actions to be taken in advance to maximise the likelihood of success.
This process enables the owner to clearly understand what is required to achieve success, set deadlines for critical tasks and delegate responsibilities to staff to move the business forward. It also acts as a management tool to empower employees to operate within clearly defined constraints as well as managing employee performance against set objectives and key performance indicators (KPI’s).
For instance, a manufacturer has developed and introduced a new product to the market that is proving to be extremely successful. The owner believes the product sales will continue to grow but the manufacturing plant has a limited capacity that will be exceeded in 2 years if sales continue to grow. Knowing this in advance will enable the owner to identify whether they can afford to possibly expand the existing manufacturing facility or build a new facility. Alternatively, the budget may show that the business cannot afford either of those options and the owner may need to consider obtaining a loan to fund the expansion or look at outsourcing the manufacturing to another party.
How often is a budget updated?
A budget is a living document that should be used frequently to track whether you are tracking to achieve the objectives set. By referring to the budget frequently, business owners can identify areas where the business is off track and take the steps necessary to make corrections.
Without going through the process of continually monitoring the business performance against the budget on a regular basis, you are leaving everything to chance. In our experience successful businesses don’t happen by luck, they are the result of well executed plans.
Where to next?
If you want to know how you can make your business successful, our accounting services are tailored to helping you achieve that goal. We can help you put a budget in place, project the financial performance of the business and help you monitor and manage the performance of the business along the way. To discuss how our accounting services can help you build an exceptional business, get in touch with our experienced team here.