The importance of planning and budgeting

I am sure many businesses have been planning and adapting throughout recent times if only verbally. By going that step further and writing your plan down and even sharing your aspirations for the business with staff you will be surprised how many of your goals you are able to achieve.

Have you, like me, ever written a list and then left it on the table when you go shopping, I know I have and just because you’ve written it all down it’s surprising how many of the things on it you remember. Writing it down reinforces the thoughts, it’s the same with your business goals.

So how should you go about writing a plan?

Step 1: Define your end goal, if the thought of writing a long-term plan for the next 12 months seems daunting then break out down and write a quarterly plan instead. Over longer timescales, it can become increasingly difficult to track progress towards objectives.

Step 2: Write a list of the steps you’ll need to take in order to reach your goal, it doesn’t matter how many steps there are.

Step 3: Have a look at the steps you’ve created and put them into order of priority, it might be that some are more pressing than others or that some steps need to be completed in order to move to the next stage of your plan.

Step 4: It’s important to set milestones and celebrate those little victories as each one is reached, it encourages you to continue with your plan, keeps you on track and can be used to examine progress and to maintain motivation towards short-term achievements. In addition, deadlines often inspire productivity as in accordance with Parkinson’s Law:

‘Work expands to fill the time available for completion’.

Step 5: Identify what resources you are going to need and where you can find them, it can be a good idea to set some budgets, so the costs are kept to a reasonable level for your business.

Step 6: Can you visualise your plan? Can you see yourself reaching the end goal of your plan? This is where it is good to ensure your goals are SMART by this I mean

1. Specific

2. Measurable

3. Achievable

4. Realistic

5. Timebound

Step 7: Lastly, as I said at the beginning your plan should be regularly Monitored to evaluate the progress and then updated and adapted as necessary as things change to ensure your end goal is achieved.

If you want to put plans in place for your business but don’t know what is achievable or where to start, then it may be a good idea to look for a business coach who can go on the journey with you. A good business coach can be worth their weight in gold especially if you run your business alone and don’t have anyone you can bounce your idea off.

One of the key things to look at when planning is to create a budget. There are two different approaches to setting a budget for your business, if the business has been trading for one or more years a historical approach is the most common, but if you are setting up a new business what then? This is where a zerobased approach will need to be used as there is no historical data to base your budget on. Oftentimes budgets will contain elements of each approach especially setting a budget for a brand-new project.

Historical budget

In this method, we project future revenues and costs on the pattern of recent years’ trading, looking back and seeing the pattern of the revenues and costs by week or month and from there predict what might happen in the future.

The zero-based budget

This method starts from a position of zero costs and zero revenues, and each element of the budget is justified and challenged. Obviously, the only option available to you if you are starting a brand-new business.

Both the Historical and ZeroBased budgets have their place, the zero-based option will be more time consuming although it can create the most well-founded financial budgets as everything is considered and challenged.

Key budget elements

When creating a financial budget for your business this can be an overall budget for the whole business or a smaller one for example for the marketing. Whatever budget you are creating there are some key financial considerations:

■ Revenues

■ Costs

■ Investments

■ Financing

■ Credit management and cash fows

Let’s look at revenues and costs. There are three types of monetary flow, which apply to both of these, fixed, variable and one-off costs, all of which need to be considered.

Fixed flows

These are flows that are known with reasonable certainty for the budget period and are usually related to a fixed, contractual arrangement for example the premises rent, machinery lease costs, maintenance contracts. On the revenue side this would include any contract or retainers’ revenue or indeed rental income if the business has property. As these are well-known it is a good idea to use these as the first entries into your budget.

Variable flows

These are flows that come generally as the result of normal business activity. Sales, not including those retainer and other fixed income costs which have already been discussed above. Costs of raw materials, related to the budget period, which generally scale with the volume of production, also fall under this category. Projection of these flows will normally be based on their equivalents from the previous financial period where products or services exist in both periods.

Variable flows will be based on expected activity that has been planned by the business for the budget period. While a Finance function may be able to do reasonable projection of these flows based on previous activity. The variable business functions will have to be monitored and amend based on knowledge of the current market situation and the assumptions that have gone into their business planning.

One-off flows

As the name suggests, these monetary flows are neither fixed nor variable, but come from expected transactions that, while the value and timing are known they are significant in scale and not likely to be repeated on a regular basis.

These would include the sale of Assets or the freehold or lease on a business premises, or the receipt of one-off Grants. Conversely one off Out-Flows would include expenditure for new plant and machinery or another large asset. A significant change in value of stock of goods held could be either depending on whether then stock is increasing or decreasing in value.

Creating the budget

In order to create our financial budget, using the more common historical method we need to consider all costs and revenues that have occurred in recent years of trading. It will be necessary to list all sources of cost and revenue from prior trading and determine its flow-type and its likely impact during our budget period.

Budgets need not be over complicated, however the greater the detail in a budget the more likely it will be that you’ll be able to identify elements are not staying in line with the budget, variances should be calculated and reported at least quarterly in order that action can be taken to correct the negative occurrences or exploit the positive ones which will show where extra money will be available.

If you are tasked to compile an overall budget for your company, it will make your life a lot easier if the information you receive from each department is in similar format and detail to this end it will be worth your while to create a template for each department to complete. This ensures that you have the right level of information to bring together and a consistent basis to track the progress of the organisation through the budget period.

All flows should be accounted for in the template that you provide to each contributor, as this will ensure that all items are captured, including those unexpected costs and revenues.

While creating a plan and such in-depth budgets is time consuming having a good understanding of the numbers in your business is crucial for future health and indeed growth. Happy planning!

Wendy Tate

Bean Counters

Bean Counters is a forward thinking Accountancy practice, specialising in Xero Cloud-Based Software and have been a Xero certified practice since 2014. Whether your business is new or old it needs efficient accounting services for growth and sustainability, we offer an outsourced accounting solution tailored to your needs. So speak to us about your bookkeeping, payroll, VAT and compliance needs.

07810 562295

wendy@bean-counters.co.uk

bean-counters.co.uk