Introduction
Ask most small/medium sized business owners what an annual budget is, and they will likely respond with something like: a financial plan for a firm’s future that projects revenue and expenses.
Ask them if they have one, however, and in many cases, you will get a variety of excuses why they don’t.
When running a business, it’s easy to get bogged down with day to day problems and miss the bigger picture. Successful business leaders allocate time to:
- Create a Strategic Plan for their business,
- Prepare a Business Growth Plan,
- Create Annual Budgets, and
- Regularly monitor their financial situation and business performance against their budgets and Business Growth Plans.
Budgeting identifies current and projected available funds by month for the 12 months that the budget covers, anticipates incoming revenue, and provides an estimate of expenditure to achieve the sales target.
By referring to their budget, businesses can ensure that resources and funds, are available for initiatives that support business growth and development.
It enables the business owner to concentrate on running the business, improving profits and increasing return on investment (ROI).
Budgeting is a key element for achieving business success. It helps with both planning and control of the finances of the business. If there is no control over spending, planning is futile and if there is no planning there are no business objectives to achieve.
What is an Annual Budget?
An annual budget is a plan to:
- control the finances of your business
- ensure that the business can always fund its current commitments
- enable the business to meet it objectives and make confident financial decisions; and
- make sure that the business has money for future projects and commitments.
The benefits of budgeting should never be underestimated when running a business:
- budgeting estimates revenue, plans expenditure accordingly, and highlights any spending that is not part of the budget
- budgeting ensures that money is allocated to those things that support the strategic objectives of the business
- a well communicated budget helps everyone understand the priorities of the business
- the process of creating a budget provides opportunities to involve staff, resulting in them sharing the organisation’s vision; and
- engaging the team in reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.
If you are running your business without a proper budget, you may find you’re actually just running around in circles and not meeting your long-term goals assuming you have defined and quantified them.
By taking the time now to set a budget, you will free-up time in the future, and give yourself the best chance of achieving the rewards you want for your hard work.
Who is responsible for the budget in a business?
The Chief Financial Officer (CFO) is ultimately responsible for managing the company’s finances, including top-level budgets.
The CFO bears much of the responsibility for reviewing and finalising corporate budgets for submission to the Board or Executive Management team, based on input from the accounting team and divisional managers.
An annual budget lays out your company’s projected income and expenses for a 12-month period. … ideally, month by month, at least quarterly. In many instances, a business’s annual budget P&L is expanded to include a balance sheet and cash flow statement.
The Budget Process:
Annual Budget Calculation -scott-graham–unsplash
Step 1. Collect your numbers to create an annual budget. You can start your annual budget by reviewing the annual profit and loss statements from the last two years
Step 2: The first step in creating your operating budget is to create a sales budget.
Step 2: Budget your variable costs based on the budgeted sales. I.e. costs that vary directly with the level of sales.
Step 3: Budget your operating expenses required to achieve the budget.
Step 4: Allow for unexpected expenses. (A contingency).
Step 5: Track your actuals monthly against your budget for the current month and Y.T.D. Establish why it has changed and take action to fix issues, take advantage of opportunities and maintain a full-year forecast that is revisited and updated, if necessary, every month.
So, Why is Having an Annual Budget So Important?
A solid budget serves as a road map for a Business Owner or CEO to ensure that they are on track to meet their goals as they navigate through each month, quarter, and year.
The point is; to establish definitive sales and spending targets that you can use to measure the success of your business strategy and manage your financial resources.
Aside from being a benchmark, a budget is also an important tool that can actuate change by holding the relevant managers accountable for their achievement.
It also provides benchmarks for setting targets for incentive-plans.
More Specifically
1. Your Budget Curbs unbridled spending
Owners and department managers will more carefully consider their purchases if there are spending limits, and accountability if they exceed those limits.
However, disciplined spending doesn’t mean deprivation. The beauty of a detailed budget is that it illustrates how the numbers are connected; how an increased expenditure in one department can be balanced by a decrease in another.
Understanding this incites managers to work together and avoid overspending without sacrificing necessities.
2. Motivates employees
It’s important to communicate the company’s goals to your team and make it clear that the budget makes it possible to fund those goals.
A simple statement like, “We need to make $X in sales and spend no more than $Y in expenses in order to have the funds to expand into “Z” market by the end of the year,” gives employees a quantifiable goal on which to focus.
Your budget may even inspire staff members to think outside the box for solutions to sales shortfalls or expense overages in an effort to help the company hit its targets.
The result is a unified, engaged and committed team, which in turn, reflects on the company.
3. Keeps stakeholders on the same page
Of course, investors, shareholders and other interested parties want your company to succeed, but they also need to protect their interests.
So, when you want to expand your business in any way (which always results in increased expenditures), it’s in your best interests to have a solid budget, and a Business Growth Plan in place to give stakeholders confidence that your finances are being well-managed and to get them on board with your goals.
When all parties are in agreement with the company’s objectives andhttps://davidamer.com.au/services/how-to-create-your-customised-business-growth-plan/ the plan for meeting them, it’s much easier to gauge progress and work together to keep the company on track.
Once you begin using your budget to measure performance, you will almost certainly realise additional benefits unique to your company or industry.
CONCLUSION
A solid financial budget serves as a road map for a business owner to ensure they are on track to meet their goals as they navigate through each month, quarter, and financial year.
The Chief Financial Officer (CFO) is ultimately responsible for managing the company’s finances, including top-level budgets.
By referring to their budget, businesses can ensure that resources and funds, are available for initiatives that support business growth and development.
It allows the business owner or CEO to concentrate on running the business, improving profits and increasing return on investment (ROI).
Next Steps
If you would like to learn more about budgeting, financial management and business planning you can book a Free 20-30 minute strategy call with me personally in my calendar, so we can discuss whether working with me to learn more about budgeting and business planning click on the link below to book your free 20 strategy call.
Book a Free Strategy Call To Learn More
You will receive an email confirmation and a reminder from my booking system prior to the meeting.
Or call me or send me a text message with a brief explanation of what you need help with, and I will call you back for an initial chat within 24 hours. My mobile number is 0418 277 137
Last Updated July 2022
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