Many business owners fail to set a budget and don’t consider this to be important. They either think they are not big enough to require a budget or they have their budget in their head.
A budget is the success plan for a business, it helps you plan and to reach goals within your business. It’s the blue print to making sure you are earning the profit you want and are in control of the costs related to the income of the business.
Firstly, you need to know how many items/hours you must sell per month to reach your targeted income. This is then phased over a 12 month period. If you are currently not able to work out this part of how you will earn your targeted income, then you are not setting your business up for success.
Secondly, you need to match the costs related to your targeted income in order to achieve your goals. If you are in a service based industry, you will have direct costs related to each hour that you charge out. You need to calculate exactly how much each hour actually cost you i.e. wages, superannuation, rent, vehicles etc.
By having a budget in place you can monitor your results over the year and you can track your results against your budget. You can then work through the process of identifying the differences in budget to actual results and why the differences in results occurred. Once you have identified why they occurred, you can adjust your budget or spending to get back on track.
Remember, if you do not have control over your costs you won’t know if you are on track for your profit target. A budget also helps you to identify the standard for cash flow within your business. You cannot maintain cash flow without setting a plan in terms of what is happening with your income and expenses.
So setting a budget is really important for making sure you achieve the profit target and obviously the cash flows that you want in your business.
This blog is authored by our ReadyFundGo expert Mitchell Turnbull who is also a Member of the Institute of Chartered Accountants in Australia. Mitchell has many years’ experience advising small and medium businesses in Australia, including start-ups and is a Partner and Director of BridgePoint Group.