Have you ever heard the phrase ‘if you fail to plan, then you are planning to fail’? Creating a budget can sometimes seem like a pointless task, particularly when there are urgent operational issues to sort out. But when you do sit down and reflect on what you want to achieve in the coming year it can really help galvanise thoughts, ideas and plans that were perhaps not properly given the time they deserved. Putting those ideas into a budget will bring their financial impact into life.
A budget need not be a millstone around a business’ neck either, as they should be easy to update if drafted flexibly. And as you reflect during the year it will help you understand what is changing in your business.
Regularly comparing your actual performance to what you budgeted can help provide you with vital insight and shape your ongoing strategy.
So here are Westerly’s top 10 tips to building your budget and planning your successful year ahead.
Westerly’s Top 10 Budgeting Tips
- Start with a business plan. Spend some time thinking about your business’ strengths, weaknesses, opportunities and threats. Your budget should follow your plan not the other way round.
- Decide if you want to build it bottom up or top down. Both approaches can work but give different results. Bottom up will take longer but will be more detailed, as you will think about what your customers may do next year . Top down will force you to concentrate on the result you need and then work out how to get there.
- Work out what the key drivers of your business are and spend most of your available time on them. Most businesses will spend time on revenue budgets, which are important but understanding what can influence direct costs is just as important.
- Work out your assumptions beforehand. Do you think general inflation will be up next year? What will your growth in sales be? Do you need to replace any assets? These are all examples of questions which you will probably need to think about.
- Use a spreadsheet tool, Microsoft Excel is the ‘king of modelling’. Using a spreadsheet allows you to build a model which can then be ‘flexed’ if you want to change an assumption. It also allows you to build different scenarios which can be useful if you need to demonstrate to your bankers how sensitive the budget is to your assumptions.
- Break down your costs into Direct, Variable and Fixed. By breaking them down it will allow you to vary them in line with your sales budgets if necessary. When you monitor your actual performance against them you will be able to see which costs you are able to influence during the year, and therefore take decisions to reduce them if needed.
- Use the process as an opportunity to improve your understanding of financial performance. By reviewing against your budget regularly you will improve your chances of meeting the budget you set. You will also improve the accuracy of your next budget.
- Look at previous financial information as a guide when you build your budget. This is particularly useful for costs, which tend to follow a pattern year to year.
- Divide your annual budget into smaller periods to monitor performance regularly. An annual budget will help give you an overall view of where you are heading but it won’t help you to change things if it doesn’t go to plan. Successful growing businesses will monitor their performance on a regular basis, ideally monthly, to ensure they stay on track.
- Get help from an accountant. Building a robust model that you can use each year will save time and by using an accountant they will be able to guide you through the more technical aspects. You can also get your accountant to turn your budget model into a detailed cash flow forecast.
If you would like Westerly to help you build a brilliant budget contact us today!