Dear Will

In this issue of Forecast, we're going to take a look at budgeting, which many people see as a rather tedious activity. We explore the reasons why you should budget for your business, and make recommendations for keeping it as simple as possible.

Please forward this issue to anyone you think will enjoy reading it and find it useful. If you've been forwarded this issue of Forecast and would like to receive your own free monthly copy, you can subscribe by clicking here.

With best wishes,

Graham

Why Should You Budget?

As a small business owner, you may run your business in a relaxed way and not see the need to budget. However, if you are planning for your business's future, you will need to focus your efforts and fund your plans.

Budgeting is the most effective way to control your cashflow, and gives you something to measure your efforts and results against. For example, you might be over-performing, putting pressure on yourself and other resources, like staff time. If so, budgeting gives you a way of looking at the reasons why.

Let's say you have three or four products. Budgeting lets you check their relative performance against expectations, maybe allowing you to tweak your strategy. A product or service might be under-performing. You'll have the data and the confidence to stop marketing it and will be able to allocate resources more appropriately. It's not just a case of doing more of what you like doing, but of what delivers better results, and makes more money for your business.

If your business is growing, you may not always be able to be hands-on with every part of it. You'll find that money starts to move in many different directions through your organisation, and you may have to split your budget up between different areas such as sales, production, marketing etc. Budgets are a vital tool in ensuring that you stay in control of expenditure, and have something to make decisions against.

How Do You to Do a Budget?

How are you doing your budget? There are two main ways:

1. Incremental – used by most people. You take last year's figures and add a percentage for this year.
2. Zero based – you tear up last year's figures and start again from a zero base.

A budget is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future that your business wants to achieve.

Whichever method you choose, it's a good exercise to look at your business every month, rather than just at the end of the year. You don't only look at your road atlas once a year, do you? It's sensible to plan your route every time you get in the car.

In Forecast August 2007 I outlined the range of tools available to develop cashflow forecasts. The range for budgeting is the same – from simple spreadsheets to more complex and integrated accounting software packages; give me a call on 01993 771100 to talk to me about more sophisticated budgeting software.

Keep it Simple

Keep your budget relatively simple. For example, if you have four products, each incurring their own variable costs, do you really need to keep subdividing? Take a training company with a set of four seminars; you probably don't need to split the costs of postage, printing, travel, etc. Phase your budget over 12 months and run it in conjunction with your cashflow forecast (again, see Forecast August 2007).

When should you do it? Start well before the start of the current year, but not so early that it's irrelevant by the time the year starts - ideally two to three months. From then on, I'd advise using rolling budgets. This gets over the problem of when to do a budget - you just keep adding to it.

Budgeting Top Tips

• Keep it simple, so it's easy to measure performance. Your budgeting should be a tool rather than a chore.
• Link your budget to your scenario analysis, which we discussed last month, to be able to assess how you are doing against your targets. (see Forecast June 2008).
• Don't let it become constraining to you - be flexible, and design it, with help if need be, so that it works for you and your personal style.