Many Business Owners see finance as their accountant’s job, which is frankly ridiculous (that just alienated half my readers!).  How can you not know if you have enough money coming out of your business to pay your bills, pay the mortgage, feed your kids until six months after the financial year ends when your accountant submits your annual accounts.

I am not an accountant but I do understand the importance to a business of knowing your financial position and having a robust budget in place for the year. Your budget is one of the ways Business Owners describe how their business will perform and so drives performance across the business from sales, to manufacturing, to delivery and all other functions. The costs of the business must be covered by the revenue, so it makes sense that both sides of this equation are monitored closely.

Developing your business budget is no different to doing your domestic budget, quite simply use your current revenue and costs to forecast your future costs. Then get in the habit of comparing your estimated values to the ones you actually achieved on a weekly basis.

You need to know how much money you have in the bank

If you have a clear idea of when money will be coming into or leaving your bank account, you can manage your payments to ensure they are all met without having to dip into your overdraft and incurring additional costs.

Secondly the budget will highlight areas where you could save money by reducing spend on unnecessary items or changing suppliers to get a better price. It will also give you a view of who owes you money, so you start to actively manage your debtors.

Allows quick decision making when an opportunity presents itself

As a Business Owner you need to be in a position to take advantage of opportunities when they arise. The current crisis is likely to present numerous opportunities, such as buying out competitors or move into vacated markets, but they will require you as a Business Owner to be able to react quickly.

It is also likely that the COVID-19 restrictions will be relaxed in the next few weeks, only partially but possibly allowing part of your business to return to near normal. This may require you to bring staff back from furlough, re-opening premises, increasing your marketing or buying stock and supplies, all of which will require cash.

If you are in control of your finances you will always know how much money is available and allow you to model financial scenarios in your business quickly, allowing you to pivot your business as new announcements are made by government

Your performance is driven by indicators in your business which link back to your budget

As your Budget describes your business it also allows you to monitor your business. Your revenue is going to be proportional to the number of sales you make and the value of those sales. So, by monitoring the number of leads coming into your business, knowing how likely they are to buy something and how much they may spend gives you a good indication of whether you will achieve the required revenue. By monitoring these indicators, you can react with additional promotions or increased sales activity if they start to fall.

In addition, if the indicators increase you may need to buy more stock or increase staffing levels. This allows you to maintain optimum stock levels and staffing (not too much but enough to supply demand so you don’t lose sales).

If you don’t know what you need the money for why would a bank lend it to you?

The government is facilitating a number of financial support packages to business during the crisis with the banks or directly. You may also be looking for payment holidays to existing arrangements. However, the various financial institutions are likely to want to see evidence that your business is viable before providing the loan or grant, for which a realistic budget supported by past performance data is a very strong supporting document.

A 10% discount on a sale could mean a 50% decrease in profit (or worse!)

Finally, your budget support sales decisions.

  • If you sell your product cheaper than your competitor will you still make enough money to cover your costs?
  • If you discount your product by 30% to increase sales by 50% will it increase or decrease you profit?
  • If your sales team get 3% of the sale price as a Sales Incentives will they sell enough product to bridge the gap in increased costs to support the payment?

These are all decisions as Business Owners you make on a daily basis, but without an accurate cost model you have no idea of the impact on your profits.

Why ever you in business, you have to make a profit

For whatever reason you started your business, whether that was simply that you want to be your own boss, you want to be rich, you want to support a part of the community or it is your family business, you have to have to understand your numbers. Your budget describes your business in both its structured and objectives. In the current climate, when things are changing almost daily, Business Owners have to understand their finances to be able to navigate and survive until the crisis ends.