Let’s Talk … Business Budgeting
How many times have you popped to the supermarket without a list, just to “grab a few things”, only to come out with a full trolley, having spent much more than you anticipated? Running your business without setting a budget can lead you down a very similar path.
A business budget doesn’t need to be a concrete target that you strictly adhere to, it can be a dynamic plan that is regularly reviewed against your performance and can be adjusted to align with changing economic conditions. It can be a forecast to strive for and a tool to help achieve business goals.
Your bank manager may have previously taken your prior year performance and used this as a baseline for your current year’s budget in order to tick off covenant requirements, however this will not reflect some factors. Factors, for example, that may affect what lambing percentage you can expect, what additional labour units you may need, or the capital expenditure requirements in the coming year, so to create a budget that is useful for your business today, you will need to take the current year’s circumstances into account. We discuss some of these below.
Setting a budget can help track your cashflow throughout the year. It can highlight where you expect cash shortfalls, where you may need to discuss extending overdrafts with your bank manager, or where you will have cashflow peaks and can strategically plan your capital expenditure. It is important to include any personal expenditure/drawings in your budget; it can be easy to forget the non-deductible portion of home office expenses, private vehicle expenses and personal tax payments that are made through your business; these can accumulate to a significant amount over a year. Completing a sensitivity analysis on your budget is an additional advantage that may assist in preparing for various financial outcomes – for example, calculating what effect a 2% increase in interest rates would have on your bottom line, or a $10/head reduction in lamb sales.
When you’re entering the final third of your financial year, it is advisable to review your performance to-date. If your performance has exceeded expectations and cashflow allows, it may be beneficial to bring forward some of the next financial year’s planned R&M to reduce your taxable income, however it is prudent to discuss this with your tax advisor to ensure your planned expenditure is an allowable deduction under tax legislation.
The current economic climate illustrates how helpful a regularly reviewed budget can be. It can provide information for meaningful discussions with your bank manager regarding increased working capital requirements, or for your accountant when deciding about re-estimating provisional tax or deferring tax payments.
Regardless of the industry you are in, there are some great software packages available which are customisable to your specific requirements. These can simplify your budgeting processes and integrate with your accountant’s systems. If you need help with setting up a budget, talk to your professional partners; they too, are invested in the success of your business and are simply a phone call away.
