It’s the new year and many of us are gearing up and preparing for it. One of the items on your list will be the business budget – your roadmap for the next 12 months.
A budget guides you through the year and ensures sensible and essential spending of the money that pours in.
While many business owners take the time to create a budget, there are some shortcomings that surface again, and again.
Here I will share 6 budget pitfalls that you can make sure to stay clear of in 2017. Use it to create your 2017 budget or to relook at the budget you have already worked on for 2017.
One can easily forget to include expenses on your budget that are not mainstream. Items that do not fall into the category of salaries, maintenance, transport, utility bills and connection costs may go by the wayside.
You will need to perform some of your own research to identify all costs that you incur. A good place to start will be to look at what items you have paid for in the past.
Do not limit yourself to just one source:
- Look at the bank statements of the past 3 months. Skim though all the expenses and you are bound to find a credit card charge or debit order that you have overlooked.
- Have a look at your most recent financial statements. Is there something disclosed that you may have forgotten? A lawsuit that is pending for example?
- Have a look at your prior period budget to check if you have missed anything out this time round.
- Look at petty cash expenses of the prior year – you may have omitted small expenses such as tea and coffee expenses, staff lunches and birthday gifts.
The success of a budget being your roadmap is ensuring that you have included all the expenses that your business experiences. Take extra care to ensure the completeness of your expenses.
2Sales projections not realistic
Sales are the driving force of your business. Without it, your business would be unable to sustain itself.
Sales is the driving force bringing money into the business. Your level of expenses per your budget will depend heavily on the accuracy of this figure.
Therefore, I stress that the increase in revenue for the coming year be analysed with extreme scrutiny.
Too often, the sales figure for the budget is estimated at a flat increase of for example 10% from the prior year. Yet this figure is not sufficiently backed up. This is especially true if the prior year increase was a mere 2.5% considering the trying economic environment.
Whatever increase is used in your budget; you must be able to back it up. Here are some tools you can use to determine what increase in sales you should use in your budget.
Related: Budgeting Basics
Try using more than one to obtain a more holistic feel of the increase that should be applied:
- Speak to your sales team – get their insight as to how they see sales increasing in the current year because they have their finger on the pulse. If you handle the sales yourself, perform a detailed analysis of your sales figures. How did your customers feel going into 2017?
The more optimistic the arena, the greater your chance of scoring new clients.
- Perform market research. There are companies out there who offer market research packages. Perform detailed market research to find out what your current and potential clients are thinking for the new year. Use the results to estimate an appropriate sales growth rate.
- Analyse the sales figures of the prior year. Is there a specific month when sales skyrocketed?Why? Is it bound to happen again this year?
- Analyse the future periods. Are you planning to offer a new service in March 2017? Think of how you expect this to increase your sales from March 2017 going forward and adjust your budget to account for this.
- Look at what the industry is doing. Do some research to determine what the industry expects to do in the next 12 months. If it has an average of a 3% increase, your projections should speak to this. An increase of 20% would be unreasonable in this instance.
- Don’t be scared to use different percentages for different months. Some months may also see a contraction in sales – that is reasonable if for example the previous month had a sharp increase.
Don’t be afraid to be too detailed in your analysis of sales because this figure is so important. While you cannot possibly be 100% accurate, you could try to get pretty close if you pay attention and put in the effort.
3Blanket increases for expenses
It is dangerous to apply a blanket increase to the expenses in your budget.
A blanket increase can apply to a certain group of expenses – those that will increase in line with inflation for example. However, most expenses will need due attention if you want your budget to be realistic.
Each expense should be increased in line with that that which drives the expense.
Let’s look at a simplistic example. If you expect sales to decrease by 5% in the coming year, the costs driven by sales would also decrease by a similar percentage.
If you drive to your clients daily as part of your service to them – your petrol expenses would go down. Cost of paper used for new client contracts would go down. If you are a manufacturer, your manufacturing costs would go down.
Salaries should move with the salary increase expected as well as headcount.
If you expect a certain expense to vanish then this should be included as well. For example, if you are doing away with weekly staff lunches then this should be removed from the budget completely.
Marketing expenses should move with how vigorous you expect your marketing to be in that year. Do you intend on putting up a billboard or are you tuning to social media to spread the word?
Smaller expenses such as postage costs and stationery can be lumped together and increased by inflation. This is assuming that you will be using the same quantity as the prior year.
Expenses should be increased or decreased in line with the drivers of that expense. Do not opt for a flat blanket increase/decrease to expenses when preparing your budget.
Related: Streamlining Budgeting and Forecasts
4Not using the budget to benchmark against
Your budget serves as your plan for the next 12 months. It should thus be used as a template for your income and expenses for that period.
Each month, you should assess the actual amounts as compared to the budgeted and identify any variances. Variances should be explained since you have accounted for the most likely scenario in your budget.
For example, if your sales have declined as opposed to an increase when you introduced the new service, you should be able to explain why. You may have offered the service free for the first month or perhaps your clients found a cheaper alternative.
If your salary expense increased more than what was expected, you could explain that you needed to hire a temp to assist with a sudden surge in demand for your product or service.
The budget compared to actual will indicate to you where you are overspending. You can then focus on this expense and better control it.
This will assist you in reaching bottom-line targets.
It can also indicate to you whether your sales are progressing as planned.
If you are achieving less sales than expected, you may be falling short of the competition. Or you could be the first to identify a contraction in the economy’s demand for your service.
You could draft a perfect budget but if you do not use it for its intended purpose, it’s for naught.
5Prior period errors not re-visited
Your prior period budget errors in estimation should be used in the current year. It tells you where you have fallen short.
You could have been overoptimistic of sales figures in the prior year. Or you could have used an incorrect driver in estimation of a specific expense.
Use your prior year budget as a base to improve your estimation in the current year budget.
Instead of making the same mistake again, use your prior year budget to make your current year budget better. In this way, each year will be an improvement of the year before.
Budgets help you to manage your business better. It tells you when your sales are off the mark and when an expense if going out of control.
Its purpose need not only be for the financial year. It can even be used to plan the expenditure of a specific project. You could track this project through to completion using your in-depth project budget versus actuals.
Over time, your budgeting skills will improve and so will the management of your business’s finances.
Avoid these 5 budget pitfalls and be on your way to a better managed business.
Planning A Year End Function On A Budget? Five Fabulous Tips To Get The Most Bang For Your Buck
Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.
When you’re desperate for your event to be spectacular, but only have a shoestring budget to work with, then don’t despair, and by all means don’t settle for second best – it might be time to think out of the box this festive season.
When it comes to putting on First Class events, even if our clients’ budgets lean slightly more towards Steerage, we have had our experience and expertise tested many times over, and have never failed to deliver memorable and delightful events using these techniques.
Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.
1. Location, Location, Location
Unless you have your own venue, sourcing one may be one of your biggest items on your event budget. This should be looked at early into the planning process. It’s imperative to book a venue in advance to avoid last minute booking fees.
When it comes to finding a venue, don’t be afraid to approach things differently. There are often clever ways of using a fancy venue that may be less expensive. For instance, instead of using a venue’s master ballroom, enquire about their balcony, courtyard, or rooftop. You still get the advantage of a spectacular setting, but at a vastly reduced cost.
Consider also that mornings are often cheaper, especially if the venue can be turned around and used for another function later. Mondays are often quiet too and thus leaves room for negotiation.
2. Fun Food and Beverage
Believe it or not, your eats and drinks are not actually the hero of the event. When allocating budget and suppliers for catering, choose options that are satisfying without feeling pressured to produce over-the-top cuisine. More than that, overly-fancy or daring food could actually make people feel uneasy, and might have the opposite effect of what you want to achieve for the event – which is, people enjoying themselves!
With a small budget you have an opportunity to think creatively and venture away from the conventional approaches while remaining cost-effective. Try fun options like food trucks or mobile kitchens, if the venue allows external vendors.
Catering can be simple, yet still a crowd-pleaser.
3. Be flexible, stay open-minded
Successful event planning on a budget is all about seeing potential. You might come across free or cheaper items which may not be the exact things you wanted, but they still do the job. It might even spark another idea for decor or an activity that can work around these budget items better.
Recycle items instead of purchasing new items for every event. Reuse these items at multiple events . You can save by choosing to have items designed in such a way that they can be reused, by only changing certain parts or nothing at all.
4. Don’t be too proud to ask for sponsorships
Consider turning to sponsors to cover expensive items that are critical to the event. You might approach an existing supplier or technical partner to your business to cover costs in exchange for some tasteful brand exposure at your event, or a mention from the podium during speeches. Ensure that you have the data and audience information to make your pitch enticing.
5. Keep track…of everything
Finally, it’s important to keep track of all expenses, including the bitty ones, as they do add up quickly. The tighter the budget, the tighter you ought to be on your spending and make sure each one of the expenses is accounted for. Make sure that you’re fully aware of any hidden fees, such as set up, delivery and break down costs, prior to signing the contracts with your venue and vendors. Unforeseen costs only tend to pop up in the final invoicing stages, with a surprising figure. Check contracts, double check proposals and counter-check with final bills.
Here’s to a fabulous Year End Function!
5 Ways To Make An Impact On A Shoestring Budget
There are several ways to get involved with NPOs that do not necessarily involve funding.
If you are an entrepreneur or small business owner that wants to give back to the community, but aren’t sure that you have the funds to make a real impact? There are several ways to get involved with NPOs that do not necessarily involve funding.
1. Donate your time
If you are a busy entrepreneur, you might be tempted to simply donate money to a charity, but making an impact is about more than just the money. Your time and commitment to a cause that you are passionate about can make a real difference. Ask what an NPO can achieve with the time and skills you are able to donate, and partner with them to reach their goals in a sustainable manner.
2. Involve your employees
Your staff and your company’s time and expertise can be extremely valuable in building capacity, by sharing knowledge and skills with NPOs. Volunteering can make your employees feel good about themselves and proud to be part of your business, improving morale. It can even help you to retain or attract staff. Millennials, especially, want to work for companies that are part of something meaningful.
3. Focus your efforts
Try focusing on one or two causes where your resources and energies make a real impact, rather than attempting to be part of solutions for too many causes. You will end up making very little difference if your efforts are spread too thin. Take the time to determine what social or development issues are close to your company’s DNA, purpose and vision.
By making sure the cause is a good fit with your company’s brand and core objectives you ensure that whatever you can offer an NPO will make an impact on their operation.
4. Be committed
Effective social engagement is about long-term relationships and commitment. It takes time and sustained effort to make a real difference to the organisations with which you partner. Take the time to understand their core purpose, capacity, resources as well as the needs of that organisation in order to make a meaningful contribution.
5. Donations of goods or products
Does your company offer a service or produce goods that might be useful to an NPO? Offering services or products that NPOs most often do not have the budget for can equip and empower them to do their work more effectively for greater impact.
A Strategic Approach To Enterprise Cost Reduction
During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.
Companies in South Africa face a number of challenges that include slow Gross Domestic Product (GDP) growth, high unemployment and uncertainty associated with the current political environment. The tsunami of change driven by digital disruption as a result of the fourth industrial revolution has spread across the continent, potentially reshaping the competitive landscape in all regions. To tackle these complex and varied challenges, many South African companies may need to pursue cost reduction more aggressively.
Overall findings in Deloitte’s Strategic Cost Reduction Survey launched earlier this year found that South African companies cited “macro-economic concerns and recession” as a top external risk much more frequently than the European Union (EU) average (59% versus 34%).
Compared to European companies, South African companies posted worse historical results with over 40% of respondents stating that revenue has either remained the same or decreased over the past 24 months.
The survey found that the dual margin approach has been the norm for South African companies with cost reduction targets set very high and even higher cost program failure rates. One question to ponder is whether executives in the South Africa have subconsciously accepted the barriers and scaled back their cost reduction actions accordingly – even if a more aggressive approach to cost management could help their businesses thrive? During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.
Re-examining the strategy
Before designing a cost reduction programme, make sure your overall business strategy is still relevant within the current environment. Organisations transform their business for different reasons. Some are positioning themselves for new growth opportunities while others are restructuring to improve efficiency and reduce costs. What they have in common is the desire to dramatically improve their business performance.
Cost reduction programmes are commonly carried out in silos, without much more coordination than each having some portion of an overall rand target to meet. The task then becomes so complicated and fraught with sensitivities that little happens in the way of sustainable efficiencies. But it needn’t be so. If you go to the trouble of mobilising for cost reduction, you might as well make it stick, and create some competitive advantage along the way.
Traditionally, a company bases its strategy on its best prediction of what events could affect its business, and when. But in a fast-changing business environment, you need an approach that doesn’t require you to pretend to have a clear picture of the future. One way to do this is to define a range of scenarios of what the future may hold. Then, develop the best strategy to respond to each scenario. Initiatives that make sense only for certain scenarios become your “contingent strategies.” Once you formulate the core and contingent strategies, your cost reduction program will have to be just as flexible.
Establishing a cost base
A cost reduction programme is only as good as the data it’s based on. You need detailed cost data to identify which factors are driving business costs, as well as to justify cost reductions. The next step, therefore, is to figure your current cost baseline. The cost baseline indicates the costs you would incur if you took on no new cost reduction initiatives and with a cost baseline, you can measure the effect of your cost reduction programme by comparing actual costs to the expenses that would have occurred without it.
Start by updating the current year’s budget to reflect any new efforts, such as staff changes or the introduction of new products. This is a good time to cancel anything that cannot be resourced or no longer supports your strategy. Next step is to analyse your costs and headcount by business line, function, and location. Clearly state any rules for allocating centralised functions or shared services to individual lines of business.
While you’re doing this, try to figure out how your business came to have the cost structure it does. It probably is a product of many leadership regimes and acquisitions. Understanding the history can help you identify promising areas for cost reduction. Assess how each areas performance compares to that of best-practice organisations. If there’s a gap, determine how much you’d need to improve in order to close it. At the end of this project, you should have a decent sized list of potential cost reduction initiatives.
Set Cost Reduction Targets
One way to establish cost reduction targets is to try looking at them from several perspectives, such as:
- Contribution to Strategy – How the initiative will affect your strategic goals and impact on business Continuity.
- Investor View – This is how much cost cutting you need to do to support your current share price, assuming revenues stay flat. If you look at cost reduction from all three perspectives, you can triangulate them to set a cost reduction target that’s both achievable and acceptable to investors. Competitive View – Tally how much you need to save in order to become as efficient as the top performers in your industry. Knowing what your peers have achieved can give you an idea of what you can achieve.
- Operational View – Looking at each line of business to identify potential cost savings, and then aggregate them across the company.
- Ease of Implementation – Identifying whether there are any technical or cultural obstacles to implementation and how you deal with them?
- Risk – In terms of how significant are any implementation risks?
Companies that are able and willing to make bold cost moves could find that the current economic environment is a prime opportunity to position themselves for long-term success. Tactical cost actions alone will likely not be able to deliver the required level of cost savings. Companies need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralisation, reconfiguring the business, and outsourcing/offshoring business processes.
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