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 The planning business owner’s guide to budgeting

 

 Business owners are doers, and so tend to neglect formal business plans and processes in favour of action and intuition. Often an annual budget, if it is drawn up at all, is simply last year’s income statement with an inflation adjustment.

This is a great waste of an opportunity for a business owner to gain control over their destiny, to increase their ability to make sound financial and business decisions, to avoid shocks and financial shortfalls and to increase the certainty of their business success, says Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS).

A thoughtful budget holds all of these advantages for business owners, says Jeremy, who proposes the following steps to draw up a business that will fortify a business for an action packed year.

Step 1 - Reflect on the past year:

  • Start off the process by spending some time looking at your financial statements for the past year. Think about how the actual income and expenses varied from the figures planned. Were they once-off variances or ongoing adjustments that had to be made? 
  • Think about the negative variances - expenses that turned out higher than expected or sales figures lower than predicted. What needs to be done to avoid them in future? How much would any corrective measures cost?
  • Look at your sales in comparison with the growth of your industry. A good source of industry-wide trends is Stats SA. If your sales had increased more than the growth in your industry, or shrunk less than the industry’s as a whole, you are gaining market share and are clearly doing things right. But if your sales lag behind that of the growth of your industry, then your business is underperforming and could do better. Ask yourself why. What needs to be done to correct your prices, your quality or your service, and how much will it cost?
  • Have a look at your human capital status. Have you lost key personnel? Is somebody underperforming? What needs to be done to improve performance or retain good staff?
  • Think about the efficiencies and productivity of your operations. What must be done to improve it? If you need to install back-up power to counter the effects of load-shedding on your productivity, for example, it needs to be incorporated into your budget for the coming year. (Remember, BUSINESS/PARTNERS provides loans of up to R250 000 to existing clients to purchase power generators.) 
  • Review your clients and suppliers. Not all clients are equally valuable, and some may even be costing you more than they are worth. Rate your clients, consider who you should cut ties with and budget for those decisions. Do the same for your suppliers. Look at the alternatives in the market with regards to price, quality and credit terms. 

Step 2 - Scan the environment:

  • In an interconnected world, no business is immune to what is going on locally, regionally, nationally and globally. Consider what is happening in all of these spheres and how they will impact on your business. 
  • Inflation is certainly not the only indicator to take into account when scanning the business environment. Interest rates, exchange rates, fuel prices, the supply of electricity, expected weather patterns, international processes such as Brexit, the trade war between the US and China, the Coronavirus in China, the growth of the regional, national and indeed the international economy all effect your business, and must be accounted for in your budget.
  • Consider carefully how technological advances will impact your business. It may boost your sales and improve your productivity, or it could destroy your business by making it irrelevant. Should you adopt the latest tech or adapt to it?
  • Scan the legal environment for any new laws that may affect your business. Even if no new legislation is imminent, give some thought to the growing pressure on all businesses to make sure that their activities contribute to uplifting the community and do not harm the environment. Adjusting now for tighter regulations in future may be wise. 
  • In difficult economic conditions you need to think carefully about how best to grow your business in the year ahead. Are you planning to sell the same products to new clients, or new products to the same clients, or new products to new clients? You will need a well-structured marketing plan, and your budget will have to reflect it. 

Step 3 - Incorporate it all into a holistic budget:

  • After a thorough reflection of your business’s performance over the last year and a scan of the environment, you are finally ready to incorporate your insights into a proper budget. Clearly, it is not merely a morning’s exercise.  A proper, useful annual budget for a small and medium business is a solid week-long exercise - probably more if you are doing it properly for the first time.
  • Remember that a budget is not merely a projected income and expenditure statement. It must consist of a separate sales budget, an overhead budget, a capital-expenditure budget, a human-resources budget and a special projects budget. Then, all of them must be incorporated into a global cash-flow budget. 
  • Drawing up a budget is a useful opportunity to bring in outside expertise to advise you on how realistic you are about your plans and projections, and to help you measure your performance against the rest of the industry. 
  • Once you have a proper budget for the year, make sure that you build in a budget-variance report into your monthly reporting cycle.
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