A BUDGET IS one of the most, if not the most, important document in your business, at least in the context of financial control writes Adrian Goodman (pictured), managing director of PPX Consulting.
A vital part of your performance evaluation (which is, in itself essential to establishing control in your business), your budget provides a benchmark against which to compare your performance and assess the economic viability of your business.
When I mention the word ‘budget’, people often associate it with spending restrictions, which is understandable when you consider that most people’s initial experience of a budget is some form of household budget. For example a shopping budget, Christmas budget or holiday spending money. Similarly, big purchases such as houses and cars will normally have a budget assigned to them, which can’t be exceeded.
The reason for this isn’t hard to see. A household generally receives a finite level of income and is therefore constrained in how much of that income can be allocated to different types of expenditure. In this situation it makes perfect sense to assign restrictions to avoid running out of cash.
A commercial budget is a different concept entirely. Rather than restricting spend based on a fixed amount of income, the approach should be the best use of that income in the pursuit of more income. The focus shifts from restricting spend to optimising spend and in many ways the goal is to spend more money as long as that spending will generate sales or improve margins.
For example adding another salesperson will hopefully lead to increased revenues, even though you will incur the cost of an additional salary. Upgrading your machinery may cost more in the short term but reduce running costs in the long term.
Booking a stand at an exhibition may cost a lot of money but if it generates more profit than it costs, it’s money well spent.
The key to effective budgeting is to be realistic and practical. A budget is neither a forecast (which is generally the extrapolation of a trend) or a target (what you hope to achieve if you really push yourself).
It shouldn’t be optimistic or pessimistic; it should be the most realistic estimate of your expected performance, based on the resources you have at your disposal.
It should also be based on something you can measure – for example: expected sales volume x expected selling price = sales budget. This ensures that you will be able to analyse results later on and pinpoint the reasons why you fell short.
After all, there are only two ways you can miss your sales budget, either you didn’t sell enough volume or you sold it too cheap (or a combination of the two). Having this information in your budget will make your analysis and decision-making a breeze.
To create a budget that will provide all this functionality takes time and patience. In some cases, you may need to enlist the help of others in your organisation and sometimes it will take several drafts to get it right. But all this time and effort will be worth it when you have a roadmap to success.
ADRIAN GOODMAN
01536 856740