Use your Budget Better – Improve your Profits!
Rescue your budget from out of the bottom draw, give it an overhaul, and then actively use it to inform your decisions and boost your business.
A budget is a listing of what you intend to earn and spend, usually during the next year, split into months – it outlines what you want to get done in your business in monetary terms.
The last few posts have focused on how to pull your budget together, but a budget, as with any report, is only useful if it improves decision making.
* How to Start a Budget and why Bother
* How to Build a Budget (and improve your profits)
The process so far created a simple budget, to recap:
- STEP 1 Gather your Budgeting Calculating Ingredients
- STEP 2 Write down your Future Plans
- STEP 3 Sort out your Future Plans into Budget Headings
- STEP 4 Apply the dollars to your Budget Headings
- STEP 5 Do a Profitability Check
A Forecast is a reflection of how your business is expected to track, based on what you have done to date, what you said you were going to do (your budget), and therefore what is left to get done.
Budgets are often tied to forecasts, and are in-fact most useful when they are “rolling”.
In large corporations budgets are used as a way of allocating resources, checking on management and locking down shareholder returns – sticking to them is therefore critical. Budgets therefore become a force majeure and meeting the budget an essential performance requirement. Forecasting is used as an additional way of enforcing and predicating behaviours.
HOWEVER – in small business you can spend forever predicting, adjusting and messing about at the expense of earning money!
So, A combination-document of forecast and budget is what we recommend.
Use your Budget better by taking more relaxed approach to budgeting whilst still keeping current, and your eyes on the ball….
This way you only spend a little bit of time each month on the admin, but everyone still has a CURRENT road-map to work with. The steps below minimise your efforts and maximise your profit…
A Rolling Budget is when you set your budget at the beginning of the year, track your progress for what you have achieved and then adjusts it to create a forecast of what you still intend to achieve – it enables you to continually plan 12 months in advance, rather than creating a forced horizon at a specified year end date (eg 30 June).
Think of your NaviMan (that thing in the car that shouts directions at you)
- Your budget is the calculated path based on the destination you plug in at the beginning
- The forecast varies from a budget as you hit road-works, take alternative routs etc – the voice yells “ RECALCULATING RECALCULATING” is forecasting your path and time of arrival based on the events that have happened and predicting your early or late arrival.
Got your budget all set-up and finished?
BUT many people (if not most) complete their budget then stuff it in the bottom draw (budgeting pitfall number 4). This article has 8 tips to make your budget work to improve your profit all year long.
TRICKS FOR USING YOUR BUDGET BETTER – BEST PRACTICE:
Firstly Set-up and maintain a Rolling Budget
- Set your budget annually – as part of your planning process. At least once each year sit down and think about what you want to achieve and change by the end of the next 12 months. This creates an end game and uses where you are today as your starting point. Say we start at March 2013 set the budget for the 12 months to March 2014
- Then create a spreadsheet* with Last Month’s Actual Figures – let’s say we start at March 2013 – and then add the figures for February 2013
- Fill in the gaps to create the total of your budget for the next 12 months (using the links above if you are a newbie)
- Print it out! And put that printout in the bottom draw
- Each month:
- add the current month’s figures into the spreadsheet as an extra column to show your Actuals
- Update the future months’ budget figures when and where necessary, to reflect speed-bumps, opportunities etc that you are now aware of
Tah-Dah you have a rolling forecast!
*most accounting programs will enable you to do this within their system – if this is available use it in preference to a spreadsheet because it will automatically do a lot of the variance calculations for you & it will most likely do so with fewer errors.
Secondly Confirm how accurate you are at Rolling Budgeting
After 6 months, grab the print-out from Step 4 from the bottom draw and assess how accurate your budget was (what did you get right, what did you forget or overlook); start again at Step 1. if you need to or re-tweek to improve accuracy.
Thirdly USE the information to make Better Decisions
Regularly do a quick review of Actuals against both planned and predicted, checking for variances – which line items are are good or bad; what is working and not working. The most powerful use of a budget is:
- Identifying WHERE there are differences to what was expected/predicted
- Understanding WHY the difference arose; is it permanent or simply due to some timing anomaly
- Deciding WHAT needs to be done – either a correction of your prediction or a correction of your activities to re-align the outcome with the prediction
Don’t be afraid of budgeting, or think it is “all too hard” – Budgeting is the single, fastest and most accurate way for you to rapidly improve your profits exponentially!
I’m not kidding it is an absolute Business Essential to be able to make money!
This is a very simple excel template – there are hundreds of other versions available on the internet so feel free to create your own or use another – ( a good one will have some profit and margin calculations automatically built-in)