This action is applicable to EVERY business, irrespective of size, industry, ownership, financial expertise or anything else. If you have been someone who, in the past, has not seen the value in preparing and reporting against budgets, we urge you to think again and engage the process we will outline for you.

Thinking such as;

  • ‘we can’t predict income in our business or industry’,
  • ‘there is too much change going on to predict numbers’,
  • ‘we are too small to budget’,
  • ‘we don’t know how to budget’,
  • ‘we don’t have time to budget’, or even
  • ‘our accountant has never told us to budget’, are all flawed.

Businesses fail and succeed on profit and cashflow, so not attempting to accurately predict financials is absurd and will also lead to a lack of planning and internal discipline. Even if you’re not convinced by that, at least try it for a year in the ways we will outline for you, to experience the process and then evaluate the benefits.

Follow these steps to prepare your budgets (from early April through to mid June):

  1. Consider and decide on the best directions and strategies (if you haven’t already) for the coming financial year. Directions such as expanding beyond the industry you’re currently in, challenging the current industry parameters, introduction of new products, changing industries (if that’s possible), etc. Strategies such as expansion into broader geographic markets, increased engagement of digital marketing, fundamental change to the way you performance manage people, refresh of brand, broader use of technology itself, changes in personnel/capability/roles, etc.
  2. Set and agree (with key personnel) some broad expectations for the coming financial year, following identification of the key directions and strategies to be implemented. The terms of these expectations should be specific to each direction and strategy, e.g. increases in market share, expansion into specific geographic markets, increases in revenue from online sales.
  3. Ideally, you should have historic Profit and Loss Reports completed to the end of February, on a monthly and line by line basis, therefore showing Net Profit before Tax for the financial year to date (July to February).
  4. Ideally, you should also have accurate Profit and Loss budget figures for the remaining months of this financial year … this will give you an accurate forecast of Net Profit before Tax for the financial year.

NOTE: If you don’t have what’s described in point 3 or 4, that’s ok, it won’t prevent the budgeting process.

  1. Set a top line revenue target that’s realistic and a Net Profit before Tax target that’s realistic, for the coming financial year. It’s often best to keep this ‘private’ at this stage.
  2. Ask each person/department/team responsible for revenue (generation) to set realistic revenue targets for the coming financial year, based on the information in points 3 and 4 above as well as predicted changes in the market that are likely to occur (or based on educated guesses if you do not have up to date financial data on hand).
  3. Ask each person/department/team to then set realistic direct cost targets to achieve the revenue targets for the coming financial year.
  4. Discuss the targets with each person/department/team as put forward in points 6 and 7, to eventually agree first draft targets for revenue and direct costs.
  5. Set all other costs (other than direct costs) as they can best be predicted, according to the revenue targets that are being discussed/agreed. If there are financial ‘staff’ within the business they must obviously be included in these discussions.
  6. At this point, put the total figures together in a single Profit and Loss Statement to see what the top line Total Revenue and the bottom-line Net Profit before Tax looks like. Chances are they won’t align with the numbers you had in mind in point 5. If they are under, go back to the teams, the financial people and your own estimations, and have them come up with ‘Version 2’ to get closer to what the business should expect but never go beyond realistic. Budgets that are unachievable are a waste of time and dilute accountability. If they are over then just assure yourself that they are still realistic.
  7. Once Version 2 is in, put the totals into a new Profit and Loss Statement to see what the top line and bottom lines look like. Continue the ‘to and fro’ process until the predictions give an acceptable and realistic business result, that everyone has bought into. If this becomes seemingly impossible the business probably has fundamental problems that lay outside the budgeting process.
  8. Now frame the Profit and Loss Statement budget in seasonalized months so that all revenue and expense items are shown in every month accurately, and you therefore have a realistic expectation of Net Profit before Tax for each month, July to June upcoming.
  9. Cashflow budgeting for business is also recommended, by following a similar process.
  10. ‘Sign off’ on final budgets with everyone involved, by mid-June, to be reported against on a monthly basis during the financial year (how to do this this will be outlined in an upcoming Success Action) . You now have agreed, realistic expectations for the business (and beyond just the financials) with the necessary accountability.

The key ingredients to the budgeting process are:

  • Consideration of future directions and strategies.
  • Buy in from people within the business,
  • Use of past data,
  • Educated guesswork of influences in the future,
  • Realistic expectations,
  • Investment of the necessary time into this planning process (because that’s what budgeting is … planning).

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