Do you have a business budget? Is it in alignment with your 12-month strategic plan?
These two items are critical to the achievement of your business (and life) goals.
Of course we all know what a budget is, but I find many people overlook the absolute importance of having one. So in this article, I will drill down into what an effective budget looks like and why having one is imperative.
In simple terms, a budget is a representation of what the business is going to achieve from a financial point of view.
It is one of the most important (yet often overlooked) activities of a business owner. It serves as a tool that facilitates planning, control and motivation for a business to strive to achieve.
I encounter a common opinion amongst business owners that budgets (both personal and business) are more of a restriction on what can or cannot be spent, rather than being viewed as a critical tool in the planning process.
One of the common traps when creating a budget is to take the previous year’s income and expenditure, add 10% and then say the budgeting process is complete. This fails to take into account what might happen in the economy and marketplace in the next 12 months.
When we meet our clients for the first time, one of the first questions we ask is, “How much profit are you planning to make this month?”
Almost 99% say they don’t even know how much profit they made last month or last quarter let alone a budgeted figure for the next month.
Traditional teachings recommend budgeting for sales, then calculating associated cost of sales, estimating the fixed expenses then working out what budgeted amount of profit is left over at the end of the process.
These teachings are archaic, frugal and more often than not taught by teachers who have negative emotions attached to the word profit and what profit really represents.
“Profits are better than wages. Wages will make you a living, profits can make you a fortune.” ~ Jim Rohn
What Jim was really saying there is that if you really want to achieve financial freedom and accumulate vast amounts of wealth in your life, you must focus on making profits, not just making enough to earn a wage. A wage will only fund your current lifestyle, not surplus cash that can be used for savings and investments.
Profitability is one of many success indicators in any business. It is an indicator of effective leadership and management, superior customer service and quality of produce and service, clear focus on marketing and sales and a clear sign that the business owner values themselves enough to believe that they are worth it.
Profit driven business owners know exactly how much profit they want to make. They make profit a priority. They know what jobs and projects are profitable, and how to get the best ROI from their people, products and prospects.
They know when to say ‘yes’ and when to say ‘no’ and most importantly, they plan for profit in their business.
Now let’s take a look at the advantages of planning for profit and budgeting…
- Becomes a process of planning for future growth: Your budget should account for increased sales targets, an increase in cost of sales (relative to sales increases) and map out the increase in the business’s fixed costs as per the overall business plan… E.g. Labour, fleet, utilities etc… The budget should accurately reflect the overall business plan from a financial viewpoint.
- Gives the business owner greater control and decision-making abilities based on real life variances rather than a gut feel or intuition. You can review the Actual vs Budget and look for variances such as:
- Underperforming sales – increase the marketing activities and sales conversions.
- Cost too high – cut back on spending, negotiate with suppliers or cut wastage.
- Production / performance too low – improve productivity in teams or remove bottlenecks / improve process efficiencies.
- Operational expenditure can be predicted and managed to ensure the operational capital is not being wasted on unessential operational and capital expenditure. It provides guidelines on what can and cannot be spent. Running a business Mean and Lean is the key to a profitable business.
- A budget gives clarity and sets motivating targets for the business owner to work towards.
Budget setting tip: After working with many business owners, a word of advice… The budget must not be so set in stone and rigid that it doesn’t allow for creativity and innovation.
Some business owners can be too locked in to their conservative forecasts, so that it actually restricts them rather than focusing on the bigger picture.
It is important to be bold and courageous, to set way out there goals. The world needs more people to step up to the plate and challenge the norm of what is achievable.
“A goal is not always meant to be reached, it often serves simply as something to aim at.” ~ Bruce Lee
Founder – Pravar Group
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