How to develop seriously good budgets

WHAT IS A BUDGET?

A budget is an estimate, based on what you know today, on what the net profit of your business is and what the cashflow contribution would be from your business in the future.

It is normally done for a 12 month period for the financial year, say from 1^st July 2013 to 30^th June 2014. Most businesses would prepare their budgets during May and June 2013 for this period.

It’s most important function is to determine what revenue you need to achieve in order to reach your profit targets. Comparing this to current year revenue is your growth number. If you compare this to your overall industry this will give you a good sense check of how realistic your targets are.

WHY DO A BUDGET?

There are three main reasons to do a budget.

1) Anything that requires forward planning, such as:

• Setting goals for your sales people so you will achieve your revenue numbers OR
• Setting up new sales channels in order to meet revenue numbers.
• How much you are spending with key suppliers – can you negotiate better pricing?
• How many staff do you need to hire?
• Do you need more space?
• What to do with surplus profits from a tax planning & asset management viewpoint

2) Where would a significant change in your industry impact your bottom line, eg:

• Increase in supplier pricing
• Something going wrong in your supply chain
• Movements in fx rates
• Changes in tax rates
• Changes in employment costs

3) Financial control – if you have a detailed expense budget that includes all of your cost categories, and you get reports on how much you are spending compared to that budget, may allow you to pick up any unauthorised spending early. 

Your business results will always be a factor of elements you can control and those you can’t. Going through this exercise helps you manage those things you can control and at least give you enough warning on those you can’t and to give you the time to find a different way to fix those problems.

HOW TO DO A BUDGET

Your budget will be a mixture of the following elements:

1. Revenue – what is your volume * your average price. Breaking this down by product or service type will improve your accuracy.
2. Costs to deliver: volume based – these will be driven by the same volume measures as revenue, plus any allowance for wastage and the cost of freight or postage. 
3. Costs to deliver: capacity based – these are costs which are more fixed, such as staffing or equipment. For example, this would include your customer service team or product manufacturing staff.
4. Marketing costs: this would include any advertising campaigns, networking group memberships, social media costs, plus any inhouse marketing staff you may have.
5. Sales costs: this will include your sales team, plus any commissions to either in house staff or sales through other channels.
6. Other staff costs: this includes any other staff you have in your organisation, including yourself as CEO plus administrative staff.
7. Other fixed costs: this would include the rent for your premises, annual compliance costs with your accountant, any licenses or registrations required to trade.
8. Other costs: this would include phones, travel, recruitment for new staff, staff training.

Remember staff salaries need to be increased for superannuation, payroll tax and workers compensation to get the true cost to your business.

In summary a well prepared budget will allow you to plan for the future and give you early warning signals. It will also allow you to plan for changes in your industry to maximise your bottom line, compared to your peers. 

To contact Rachel White or any other of our CFOs please email ourteam@azuregroup.com.au or phone (02) 9238 1188.