|Credit: Unsplash/William Iven
Planning is an integral part of any business and it may surprise some to know that a small business is in dire need of a plan more than the big established businesses.
A budget is a key component of the business plan however reports show that two out of every three small businesses forego having a budget for a variety of reasons. Some popular responses among small business owners regarding lack of budgeting include:
1. Budgets just don’t work
2. Budgeting is a time-consuming exercise and the time is better served doing something more productive.
3. Budgeting does not bring in money.
4. My business is too small to require a budget
Clearly, the common theme here is that these owners do not have a full appreciation of the benefits of having an official budget and see it as something that gets in the way of doing “real” business.
Even among those that prepare a budget, what is more commonly seen (even among established big businesses) is that budgets are abandoned almost as soon as they are prepared largely because they are irrelevant.
The main reason why budgets appear irrelevant is because, unfortunately, it is seen as bunch of random numbers that do not match with reality. 10 out of 10 times, A budget/budgeting system is destined to be irrelevant if the aim is just to attach some numbers to a document or the entire idea is just to add x% to what was spent last year!
Factors To Consider To Make Your Budget Relevant
Here are a few points to consider in making budgets relevant to your business:
1. Always make it a subset of the Company plan
It is expected that a business has a plan with its all its goals and objectives included. A part of those goals should be financial. The first most important step in budgeting is to link the budget those financial goals. Doing this is a sure-fire way to ensure that the budget will be relevant.
2. Make it activity based
An activity-based budget focuses more on the activity driving the revenue/expenditure rather than the amount spent. A simple example, for instance, rather than just allocating X amount to “printing purchases” and (fruitlessly) trying to fit within budget, one may determine the number of printers to be purchased, the type. when they will be purchased and the estimated cost. This will be more useful in arriving at a realistic amount for the budget. This approach helps a lot in budget variance analysis because clear reasons for the variances are identified, e.g we bought 3 more printers than expected or we took advantage of promo prices buying closer to year end etc.
Identifying and understanding the activity (or process) behind the numbers is more important than the number itself. With this the budget is always relevant.
3. Make budget/budgeting flexible
In this era now more than ever, circumstances can change in an instant so rigidly sticking to a budget prepared at the beginning of the period that has the main assumptions change will render it redundant and not useful for decision making. The simple truth is that no one can reliably predict what will happen during a budgeting period so remaining open to changing with the circumstances is important.
Updating the budget does not necessarily mean that it was useless in the first place. This reinforces why linking the budget to the goals are very important. As long as the goals remain the same, adjusting the budget to meet those goals will always be relevant.
In closing, it is important to note that the one of the primary reasons of a budget is decision-making. As the primary financial decision maker for your small business, it will be best if those decisions are backed by solid assumptions. Thinking carefully through the plan and the activities that will make the plan work will certainly guarantee that the budget will work for you.
This article was written by Ajibola Jinadu ACA, FCCA.