What's in a Budget?
A budget... What is it and why should every business owner have one and more importantly live by it when it comes to making business decisions? We all know a budget is a tool that enables a business owner to compare financial reality with financial theory, or in other words, actual figures against budgeted figures. This comparison tells us few things such as, how is overall actual performance tracking to budgeted performance, are the budgeted figures realistic indicated by any large variances between actual and budgeted figures, are the actual figures in line with the expectations of the budgeted figures, and is there any particular line item, given the size of the figure, that needs further analysis. In practice most business owners will think about a budget and put something down on paper at the end of the financial year in preparation for the next year. They will spend hours even days working on it and fine tuning it, and once they are happy with it, file it away in some aptly titled folder never to be looked at again. That defeats the entire point of a budget. The budget for a business owner is a living and almost breathing document that should be checked before checking ones email. Business owners should study it, memorise it, tweak it, refine it, adjust it and most importantly, constantly refer to it. So many times we see business owners making quick and unexpected purchases for their business, and then wonder why there are issues with cash flow and profitability. Now it would be very naive of us and even unreasonable to expect every purchase or investment to be planned and executed better than a military operation, of course in business there is always unforeseen circumstances and opportunities that have to be taken, but the point is this, with a budget a business owner can enter into the unexpected transaction and see what impact it will potentially have on business in the short to medium term, and that is essentially why every business owner needs a budget for their business. It would be remiss of us not to also mention in addition to the budget, having timely information of the financial performance of the business on hand when making any finance related decisions. At Straight Line Accounting Solutions we have created and assisted in creating numerous budgets for clients across various industries, at the same time as part of our monthly reporting to clients, we compare actual figures to the budgeted figures and investigate and analyse any variances and highlight these to the business owners, therefore enabling them to make better decisions for their businesses!