Budgeting.  Not exactly the sexiest topic on the planet, and I must say the one thing many businesses overlook, but it should be done and updated…annually.  Persuading a business of the need to prepare a budget each year is nigh-on impossible, but every entity from the government (May every year), through listed entities, right down to a micro business prepare an annual budget.

What is a budget?  Very basically, a budget is an estimate of income and expenditure expected to be received and paid by a business over the next twelve months (usually a financial year).  Ideally a 5 year budget is done with the first year being done in detail (i.e. monthly) with the following four years being completed on an annual basis.  This is then updated and rolled over each year.

A question we are asked frequently is “why is it so important?” after all, when you’re a small business it’s easy to assume you have a budget in your head.  You know what income and what expenses need to be made each month.  But (and this is a BIG “but”) what is running through your mind is not in actual fact a budget, it’s merely a roll-call of bills you need to pay each month.  Budgets are physical tangible things (usually in some sort of software or spreadsheet) which can be referred back to throughout the year.  They are intended to be used for planning, and let’s face it (and this goes for all of us), seeing in print what’s expected to happen over the next twelve months can sometimes be a really big wake-up call.

Primarily a budget is designed to ensure a business can plan for expenditure, keep an adequate float for unexpected costs and identify areas of both savings and available spend.  However a budget can also be used to identify areas of potential growth, set sales targets, key performance indicators (‘KPIs’) for your staff (including yourself), identify areas requiring attention and areas for opportunities.  It can even help identify areas of excess capacity giving the business an opportunity to plan in advance.  All-in-all it can be the single most useful tool a business has in its armoury.

So why do so few businesses actually prepare one?  First of all, and this one is key:  it’s boring.  For me as a professional to say it, it must be true.  Really boring.  It’s also perceived to be too difficult to complete and really, is it going to be looked at again all year or is it something which time will be spent on, then it will be forgotten about?

However in my experience, the most successful businesses are those which budget, then refer back to it at least monthly.  Just a check-in process to see how they’re tracking and refresh their memories on what’s expected to be happening in the future.  They use it as a way of measuring their success (trust me when I say this, the feeling of beating budget is almost as good as…I’ll let you fill in the blank).  Most accounting software allows for budgeted amounts to be included so each month it’s easy to see how the actual performance of a business is tracking against the budget.

Is a budget something which can be completed by the business or is an accountant’s help required?  This is entirely up to the business but absolutely, a budget can be completed by you.  Whether a small business has the time to do this is a matter of discretion, but where time is precious (because focus is being placed on managing and working in the business) an accountant can become invaluable.

When should you be preparing your budget?  Well, often a budget will reflect a financial year, so having it ready to go for the new financial year is prudent, but not essential.

So the question really becomes, why aren’t you preparing a budget?

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