There are very few businesses in the region that have not been impacted by COVID-19. For many, earnings are down and their businesses are struggling. Yet, we are still seeing resistance to developing budgets, and hearing every possible excuse as to why budgeting is not effective in a particular industry or situation.
We recognise that there are a lot of variables that need to be carefully considered on a client-to-client basis in order to build good budgets. However, there is no doubt that businesses with budgets have greater control and a more in-depth understanding of how to achieve their goals. In a ‘normal’ year, these goals often include profits for owners and stakeholders and setting up the business for sale, succession or retirement. This year, however, pandemic recovery is predicted to be a major focal point. These budgets need to be fluid, dynamic documents that are revisited regularly and updated as your trading environment changes. More than anything, this is going to be vital to business recovery in the coming months and years.
So, where to start with this often-considered boring business of budget building? There are a number of ways to go about it, and a lot of tools available to help you through the process. However, some key tips (and plenty of cliché’s) to get you started:
- Begin with the end in mind. Whether vague, short term or longer term, what is the end game? Presently, it may be as simple as survival or breakeven and that is the reality for many businesses. Longer term, it hopefully involves some bigger dreams which could include reduction of debt, succession or building a business that makes some healthy profits.
- Work with what you know. Use the information from the past to map out the future. Many financial commitments and overhead expenses will remain reasonably constant, or only increase slightly over time. Further, there are often strong relationships between departmental costs and income. The process of looking for this information can teach you a lot about what drives your business and identify any inefficiencies or bad spending habits.
- Bring in the variables. Every business is impacted by factors outside of their control so there is going to be some requirement for educated guess-work. However, there is no rule to say that only one scenario can be mapped. Use these changing factors to determine which scenarios could bring about the outcomes required to achieve the goals identified earlier. This also helps identify risks, capital investment or funding requirements and opportunities that may not have been previously considered.
- Cash flow is king. There are several factors that will impact cash flow and need to be considered when looking at budgets; the speed with which customers pay; your payment arrangements with suppliers; GST, PAYG withholding tax and superannuation payment frequency; non-business items or personal drawings from the business to name a few. All of these can sneak up on you if not prepared, potentially draining bank accounts and hamstringing the business.
- Revisit and review…regularly. Regardless of whether it is your time or money invested in developing a budget, the most value will be achieved by checking in to see how you are progressing against it. Further, it enables you to celebrate your wins, or adjust either your expectations or the way you are doing business.
Now, more than ever, businesses need a plan to move forward, and business owners need some certainty that they can recover from the impacts of COVID-19.
YBM have a suite of tools that can be used to assist in this process, whether it is sifting through the information, so you can start building your own budgets in excel, or the development of comprehensive three-way forecasts and documented business plans. Best of all, we love helping our clients look forward rather than just focusing on last year’s figures and tax work!