Do I really need a Budget?

Why are Budgets that important?

Just before we get too far, please note that Greg Buckley Business Advisor can offer Budgeting services through -

1. Business Advisor Sydney,
2. CFO Sydney
3. CFO Online (if your interstate)

… so after having a look at this Blog feel free to give me a call just to get started, or to talk about what we can offer you.

It is often the case we have enthusiasm and energy for our businesses, and that’s great. But this must be tempered with the reality of making profit. Loose the reality check and the focus can drift, and the business can really suffer. In essence you can and must do your budgeting. It’s not an option, it really must be done.

I would suppose most people think of budgets as a financial model of what is going to happen in the future – and that is correct. Taking the above need for a reality check into account - a budget is equally a great opportunity to look at your business in a disciplined way. And, let’s face it, if your budget numbers come in with a bad outcome, I’m sure it will grab your attention. And we can also say if the numbers come in looking great then we can have confidence about the direction being anticipated.

What should my budget look like

In the initial stages of the budget, I would do no more detail than what I have shown below. That said I may break out the labour costs if they are a big number, and also some other big numbers I felt needed to really focus on.

1. Sales
2. Less Direct Costs
3. Equals Gross Profit
4. Less Overheads
5. Equals Net Profit

What are Direct Costs – only include here the costs directly related to the activity for the Sale. Here are some examples –

Labour for tradesperson to undertake the work.

The vehicle that the tradesperson uses to get the materials to site.

The cost of materials the tradie will use.

What are Overhead Costs – after doing the Direct Costs then everything else comes into this category. I do not usually use the term Overhead Costs or Administration Costs. I much prefer the term Indirect Costs. It has a better feel to it – namely using the term Direct and Indirect (when looking at the sale) the split is usually very straight forward. There is a great deal of debate about this split, but you should make your own choices and stick to what you know is correct for your business. Here are some examples –

1. Labour that is for the admin staff – and perhaps including yourself
2. Rent
3. Gas and Electricity

And yes, definitely split a cost between Direct and Indirect. An example is a business owner who works 60% on the tools, and say 40% in managing the business.

How do I build a Budget?

There are many budgeting tools and Excel spreadsheets on the internet. You can do some searches and look for something that approximates your business. That said, if you have even some basic spreadsheet skills, I would recommend you do your own. Building your own budget, using the above structure, is going to make it specific to your business - and you can get a real feel for it as you construct it.

For source material get your bank statements and look through them. You can see the sales, labor costs, rent, motor vehicle repairs, stationary, the electricity bill and so on. If you have bookkeeping software that is up to date and useable then even better – print off your reports and use those to build your budget.

Pretty much you are now off and running.

But here’s a pro tip. Rather than getting onto the spreadsheets and greater detail too soon I strongly recommend you get a pen and paper and run some overview numbers. Use your bank and software numbers, but stay in an overview position. All you want here is to get the big numbers down and see what they look like. Tweak those as you go.

Once you have your overview big numbers done, then it’s time to get a spreadsheet happening with more detail. Break out the larger numbers into more specific costs. However, I still recommend keeping things relatively simple so the construction of the budget doesn’t outweigh the end result – and that is “am I making profit/money”.

What if …

You probably will have heard of What If Analysis. Spreadsheets are one of the greatest tools for this type of work. You can quickly change the information and see what the result are. Use your spreadsheet to run some scenarios. Examples are –

1. What if I increase selling price.
2. What if a get a new warehouse.
3. What if the prices I’m paying go up.

On a spreadsheet you can do this very quickly and you can see the results almost instantaneously. Your budget is now becoming a very dynamic tool for you to use.

Progress so far

Let’s recap what we have looked at –

1. Layout – using the Sales, Direct Costs, Indirect Costs (Overhead), and Profit gives a good layout and will be very useable later.
2. Source data – Bank Statements, and your bookkeeping software.
3. Start – use a pen and paper to get a feel and overview of what the profit is going to look like. This is important so try to stay away from the spreadsheets at the beginning.
4. Spreadsheets – these are great after doing the pen and paper first drafts, and super good for doing What If Analysis

A Cautionary Note

Make sure you stay centered and keep that reality check (discussed at the opening of this blog) in mind. Doing your budget should have made you look at your business, and then project your budget numbers for the future. Why do I raise this? As an example, increasing sales just because it looks good in the budget may have no bearing on the achievable sales. Perhaps overly forecasting that labour costs might decrease. The list goes on and frequently the optimism, or perhaps the fear of a bad profit line, overrides what needs to be in the budget. Remember, we came here to be grounded, look with a clear vision at the business, and see how things looked. It takes quite a lot of discipline to keep things on an even and realistic footing.
You can always do many versions of your budget especially when using a spreadsheet. Do your budget honestly. Then do a version where things aren’t so good. Then do an optimistic version. Sit back and look at the numbers for each. What are they telling you? What needs to be changed, where are the pitfalls, where are the opportunities.

Summing Up

The above is a good guide about doing your own budget. I strongly urge you to do a budget. Keep it simple and straight forward. Overall, you’re looking at what your business does, and what the budgeted profit may look like.
In one of my other Blogs “How can a Business Advisor help you set up a business” I mentioned Budgets so have a look at the one also.
If you need some help and direction, give me a call and we can have a chat about your business and your budget.