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.
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.
4 Ways To Improve Your Budgeting Skills
Increasing revenue isn’t solely dependent on how much money your business is making but also relies heavily on how well you manage it.
Traditional budgeting methods have undergone a digital makeover in recent years, and now offer businesses an abundance of streamlined services, tools and access to experts that will help improve your budgeting skills. From regulating current expenses to applying for funding, a well-crafted budget is an essential part of developing a healthy financial forecast for any business.
1. Take advantage of budgeting software
Creating an effective business budget will require a bit more than just utilizing a personal financing software. Luckily, there are plenty of tools available that focus on helping you get your professional finances in order. Centage, which came out in 2001, is a powerful portal that gives companies the chance to streamline their budgeting, while also providing forecasting and consolidation features to help you create more strategic budgeting plans. Investing in a budgeting software is a great way to stay organized at any stage of your professional development.
2. You can’t predict the future, but you can prepare for it
In addition to making the most of the available budgeting tools on the market today, it also pays to do your research. Understanding market fluctuations, as well as competitor activity, will help you create a clear budget plan based on these variables. Keeping up to date on the changes that tend to happen frequently within your industry will also grant your business a bit of extra confidence when it comes to making future decisions. Budgets can provide a strong financial forecast help businesses adapt quickly to changes that might have set them back in the past. For example, if your product is largely dependent on seasonal trends, these projections will give you a greater sense of which months you will be seeing more revenue, allowing you to allocate these funds accordingly throughout the year.
3. Ask an expert
Creating an effective budget for your business goes way beyond simply organizing your finances. Reaching out to an expert to help you construct a budget that fits both your personal and industry needs can better schematize your current plan, and potentially make your business model more profitable.
The rapid growth of the freelance economy has resulted in the creation of platforms that give businesses, big and small, access to a wealth of skilled finance professionals. Whether you’re in the market for a quick consulting session, or on the lookout for a long-term advisor, speaking with someone who specializes in creating budgets for business is a great way to gain valuable insight on the best ways to handle your finances.
4. Don’t forget about funding
Access to funding is an important resource for any business, especially those that are in the early growth stages. Whether you are starting out small with a modest self-investment, asking friends and family for a bit of help, or preparing to pitch a big name investor, having a financial forecast in place is a must.
For those that are hoping to get their hands on VC funding, presenting current activity and future financial projections is an essential part of the process. Of course, investors understand that budgets are subject to change, but without a financial plan in place, investors may question whether or not your business is a worthwhile investment. A clearly constructed budget can help illustrate the value of your company, in addition to showing what will be done with supplementary funding to increase growth.
For small and big businesses alike, an agile and well-crafted budget is key when it comes to maintaining and improving your company finances. From managing the day to day expenses to preparing for unexpected changes in the market, getting into the habit of good budgeting is the best way to ensure steady growth for your company.
It’s Vital To Your Business Success: How To Manage Your Budget Better
Should I take budgeting seriously, and what can it do for me?
A budget is or should be a part of your business plan. It is one of the major control methods to make sure your plan is implemented rather than ignored.
I agree that there are some very successful businesses that operate on a seat-of-the-pants basis, but there are a lot more trying to do so but instead floundering around in the dark.
Unless you are gifted with unerring judgement and great insight you are likely to achieve more success by working to a plan and budget.
Budgets are often prepared by financial managers and tend to focus on operating and capital expenditure rather than sales, purchases, inventory and debtors targets. A better approach is to start by agreeing what performance your company would like to achieve for all key areas.
The sales budget could be a separate section of the main budget to manage expected sales by whatever breakdown suits your business: Type of product, by division, branch or sales channel, or type of customer. In each category budget for margins, discounts and commissions.
Correctly managing your expenses
Key expense items like payroll, overtime, marketing promotions, travel, vehicle expenses and IT costs should be planned for and monitored via the budget but I suggest you don’t clutter the expense budget with too many items which you have little power to manage.
Rather lump these together, you can always drill down if the costs get out of hand. If you have a seasonal business with variations in sales and expenses depending on the time of the year, make individual budgets per month.
Do not forget balance sheet lines, especially capital expenses for new buildings, machinery or vehicles, and also borrowings and other liabilities.
Debtors, creditors and inventory should all be planned and monitored and it is a good idea to monitor measures like average days outstanding for debtors and creditors, days inventory held, bad debts and obsolete or lost stock.
The last items can be target ratios which may not form part of the budget, but should be reported on regularly so that you do not get nasty surprises at the year end. Prepare the budget with everyone concerned to get buy-in. The budget becomes an agreed plan of operations to which everyone is committed.
Continuously review your budget
Monitoring performance against budget should be done at least quarterly, but I prefer once per month in a management meeting. If you are the only manager, set aside time each month for a vital review your performance against budget.
The actual results must be up to date and available. Use a simple spreadsheet showing budget, actual and variance or a dashboard which shows key metrics as graphics or tables.
Examine those items where the variance to budget is significant and probe for reasons. The dangerous ones are the start of a trend — for example sales in one area consistently below budget or mushrooming overtime costs.
For any bad variances that are not just a short-term hiccup you should plan to correct the problem, or if the problem is insurmountable, replan to get around it.
Course correct your budget as you grow
The budget can be changed because circumstances are different to those envisaged when the budget was prepared, but a better option is to add another column for a revised budget, so the amount of the change remains obvious.
Managing the budget should not be limited to complaining about excessive entertainment or travel costs, but a vital tool to give stark visibility to key areas of the business that are not performing as expected.
It should involve all the key players in decision-making to catch and fix problems early, but also to seize opportunities presented by better-than-expected performance at the earliest time.
Treat budgeting as a management tool and it is likely to treat you to more profit and less nasty surprises.
An excellent way to increase profits is to treat budgeting as a management tool. Never be scared of your budget — use it instead.
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