Creating budgets for businesses has traditionally been an onerous task which does not always provide benefit to the end user. However, technology advancements are allowing business owners to effortlessly track against budgets and make strategic decisions based on budget data, transforming us into a new period for budgeting.
Why Should I Create a Budget for My Business?
To see value in anything we do, we must have a purpose for completing a task and a budget is no different. The purpose for creating and using budgets typically fall into two different categories:
Operational Budget
A traditional budget is used to monitor key income and expenses of the business. Budget data is set and actual data is tracked against the budget data on a regular basis (usually monthly or quarterly).
Reasons for an operation budget include:
- Motivation of key team members;
- Reporting to the owners or board of a business; and
- Identifying areas for business improvement.
Strategic Budget
In recent years, budgets are being more and more used as a decision-making tool. In an ever-changing economy, many businesses need to plan potential business events before they occur. Strategic budgets allow businesses to plan for the future and make key business decisions with more confidence and accuracy.
The benefits of Strategic budgeting include:
- Improving finance applications;
- Assisting in staff incentive programs; and
- Expanding external stakeholder reporting.
What Is Required To Prepare a Budget?
There are a number of materials you can prepare to create your business budget:
1. Timely Business Data
The provision of up-to-date bank feeds and current data allows a budget to be formed more accurately and efficiently. As accountants we can put more reliance on the accuracy of this data and, in some instances, can even import the data into our budgeting software to streamline the whole process.
2. Budget Drivers
Rather than budgets being based on static numbers, we can use drivers to predict and generate our budgets. This can include (but is certainly not limited to):
- Seasonality of revenue;
- Estimated customers/jobs multiplied by average expected spend;
- Days available for work per period;
- Expenses as a percentage of Revenue; and
- The number of team members or locations multiplied by a factor.
Who in My Business Should Be Involved in Preparing a Budget?
There is no ‘one size fits all’ approach to deciding which staff members to include in your budgeting process. However, there are a number of structures you could follow to help you make your decision.
These include:
- Top Down – Management creates budget and provides to key team members to utilise;
- Bottom Up – Key team members formulate a draft budget and provide to management for review; and
- Collective – All staff that have the ability to affect the budget have a collective role in the budget formulation
The key factor in deciding who is involved in the budget preparation depends primarily on time and resources available to the business.
Budgeting and Report Requirements
The timing of creating the budget and time periods within the budget normally align with reporting periods of the business. It is important to allow plenty of time prior to the roll out of the initial budget to ensure there is time allowed for any feedback and changes, if required.
How Can I Prepare My Budget?
To reiterate, there is not just one approach to budget that is going to work for everyone. There are multiple methods to create your budget, which include:
1. Excel Based Budgeting
A simplified budget which provides revenue and expense targets for a business to monitor over time. While this is the most basic form of budget, it can be very effective in providing business owners with a management tool that required minimal resources.
2. Three-Way Budgeting
This is a more holistic and advanced form of budgeting that encompasses:
- Profit and Loss Reporting (revenue & expenses)
- Balance Sheet Reporting (assets & liabilities)
- Cash flow Reporting
Generally, these budgets are completed using specialised software to produce. Whilst this may seem time-consuming on a business, many banks and other institutions that require budgets now require budgets to be prepared in this format.
Three-Way Budgeting enables users the ability to ensure that the budget is not only accurate but also that key covenants are being met (e.g. the cash balance of the business is accurate based on budget data).
3. Forecasting
Forecasting, being a form of budgeting, enables businesses to take the budget to the next level as a real strategic business management tool. Forecasting turns a simple budget into a “What if?” analysis planner by allowing the business to build in scenarios to the base budget. Examples of this may include:
- Interest rate changes
- New business acquisitions (i.e. Fixed Assets or Locations)
- New revenue streams
How Can Davidsons Help Me?
Whether you are creating a business budget for the first time, or you would like a review of your current budget, our team of experts are available to support you through every step of the budgeting process. To book an appointment with our team, please contact our offices on 03 5221 6399 or at info@davidsons.com.au.
This article was written by Senior Accountant Marnie Eastwood.
Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals. Davidsons is not licensed to provide any financial product advice nor make any recommendations in respect of any financial product. If you require such advice, you will need to consult a financial adviser who is licensed to provide financial product advice before you make a decision on a financial product.