In this article, Melissa Jacobs explores the importance of your annual business budget.
With most businesses approaching their financial year-end at the end of February, it’s a great time to start thinking about and preparing your annual business budget for the forthcoming financial year. From experience, we have seen that very few businesses, especially those in the SMME sector, prepare a business budget. We believe this is essential for the following reasons:
• Your budget becomes your financial target. If you aim for nothing, you are likely to get nothing.
• Your budget becomes your yardstick to measure yourself against throughout the year, so at any time you can determine if you are ahead, in line or behind budget, and take the necessary remedial action if you are behind.
• A budget is a great tool to restrict spending that is not part of the plan; i.e. when you prepare your budget, you plan the expenditure you expect to incur. When additional discretionary expenses pop up along the way, you can rely on your budget to guide you in this regard.• A budget is a great tool to link to staff incentives and bonuses.
• It helps to ensure that money is being allocated to resources that support the strategic objectives of the company.
The above highlights the importance of the budget, which brings us to the next question; how to go about preparing the budget? We would offer the following advice in this regard:
• Start by deciding how much bottom-line profit you want to make for the year.
• Then start at the top with your sales/revenue and budget for each month, taking into account your growth assumptions.
• Next, you budget for your cost of sales, which would normally be a fixed or average percentage of your sales.
• Finally would be your fixed expenses; go through each expense line by line and budget accordingly. Certain expenses can be budgeted with a high degree of accuracy, and others would need to be an estimate.
• You now need to compare your profit as per the budget to the profit your decided on up front. If there is a big discrepancy, you need to go back and tweak and adjust the various line items until you get closer to your desired profit. We call this the “top down, bottom up” approach.
It’s very important that you compare your monthly actuals (as prepared by your accountant) to your budget. Any variances must then be investigated and corrective action taken.
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