This article was written by Paul Monahan, Senior Manager, Business & Wealth Services practice. Paul can be contacted on (01) 792 6241 or by email
Let's start with a simple premise. "The annual budget can be the best tool to match where you want to go business wise over five years, to how you are doing month to month".
Because it works, and can work smoothly, budget planning is a vital tool for owner managers. A budget is a financial model of the future, a picture in numbers, looking forward to how your business can do. It can be simple or complicated, it can be prepared manually or on a spreadsheet, but the process of budgeting itself will always produce benefits for you!
The Benefits
- As a benchmark, to let you, the owner manager, know how you are doing typically month to month. There is no single better tool than the budget and while it won't replace the focus on cash balances and bank balances, a budget will add a lot more to your understanding of your bank balance.
- Allows you see what really matters if the unexpected happens. This is called sensitivity analysis and is useful in reducing the number of aspects of your business that you really need to focus on, while still allowing you to keep your finger on the pulse of what's happening.
- Encourages frank communications. This should be in both directions. If properly handled, in the slightly larger SME, the budget should increase the number of people able to contribute their ideas.
- Budget impresses the bank.
- A budget reduces needless worry. Because it allows you to pay attention to those items that will really have a financial impact on your business.
What Does It Look Like
Personally, to me a budget looks like a business going somewhere. The final product is columns of figures, ideally by month for the first year, quarterly for a year or two thereafter, but that seriously understates its true value. It will include each of the main elements of your business (sales, perhaps by product, gross margins, staff costs, overheads, debtors, stocks, creditors, capital spending, term loans, overdraft levels).
The process starts with what you plan to do with the business in a strategic sense and moves quickly on to sales levels. Much of the rest of the budget flows from there. The budget should end with projected bank balances at the end of each month.
I Am Convinced, Where Do I Start?
Take out a sheet of paper and write down on one side what you want your business to achieve in three to five years time.Be ambitious, but not ridiculously so. These are your strategic objectives.
On the other side write down what would really change your business, for better or worse (such as a major new customer, putting through a price rise, a new machine, a general increase in orders, a bad debt, or finance). These are the key variables.
The difficult part is setting objectives and determining variables. The rest is about putting numbers on these objectives and key variables. Initially your accountant can do this for you, but remember it is your business, your ideas and your budget.
Now you can look forward with more confidence than before.
