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 down a 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 used your prior year’s performance as a baseline for your current year’s budget in order to tick off covenant requirements, however this may not be reflective of all factors. Factors, for example, that may affect what lambing percentage you can expect, what additional labour units you may need, or the coming year’s capital expenditure requirements, 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 the 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 repairs & maintenance to reduce your taxable income, however it’s prudent to discuss this with your tax advisor to ensure your planned expenditure is an allowable deduction under tax legislation.
The 2024 financial year was a tough one for many, resulting in tax refunds and stopping provisional tax for the 2025 year. An up-to-date 2025 budget and 2026 forecast, will allow your tax advisor to revise upcoming tax payments, including reassessing provisional tax payments for the current year, which may avoid a large terminal tax bill.
Regardless of the industry you sit within, 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 forming a budget or sourcing the right software system, talk to your professional partners; they too, are invested in the success of your business and are simply a phone call away.