Budgets and bottom lines

A lack of budgeting is often a likely contributor to business failures. Paul Moodie outlines what every good budget should have.
Alarming statistics released recently
by the Ministry of Economic Development* regarding survival rates in business have prompted us to educate on ways business owners can safeguard their business.
Alarmingly only 28 percent of sole traders who started up in business in 2001 were still going in 2010. Only 46 percent of businesses employing five or fewer staff made it into 2010.
So why is it that such a large percentage of small businesses failed?
The bottom line is they were surprised by events they had not considered. This normally happens in two ways, either they hadn’t planned well enough or they didn’t know how they were going until it was too late.
The easiest way to address both situations is by creating a budget for your business.
A building plan
A budget is like a building plan. It gives you a picture of the end position and identifies all the actions needed to deliver the final desired result. The key is to commit these actions to writing and put numbers on everything.
Your budget should tell you what income you can expect, and what your costs will be.
Your budget doesn’t have to be complex. The key is to have one and to monitor your actual results against that budget.
A good budget will also give you an opportunity to do some ‘what if?’ scenarios to check how fragile the business would be if sales were not at the level you expect, or expenses were higher. What if my sales are slower than I expect? What if my costs go up? What if interest rates go up?
Once you have your budget, the numbers should then be broken down month by month, so you can continually react to changes or unexpected events. If costs are going up, you can quickly identify where you can trim back expenses or if prices need to be raised.
Either way, you will be actively managing your business and improving your chances of achieving your business goals.
A budget’s structure
Your budget is made up of information from the following three reports:
• Income Statement. Shows your sales, expenses and most importantly your profit.
• Cashflow Report. Shows money in and money out of the bank account. Profit is great but cash is better. Even if your sales are booming, will all of this be tied up in stock and with customers who owe you money? Will you need an overdraft? A Cashflow report helps you answer these questions.
• Balance Sheet. Shows your assets and liabilities. If you are going to be as profitable as you expect, and people pay you as you anticipate, your assets and liabilities will reflect this.
If you are looking to start or buy a business, make sure you have a good budget in place first. This will give you the confidence to continue or walk away before you have made any costly mistakes. Once in business, make sure you monitor how you are going compared to your expectations and make sure there will be money in the bank. Once again, profit is good, cash is better.

Paul Moodie is principal and business adviser at WHK Dunedin. Email: Paul.moodie@whk.co.nz
*Source: 2011 ‘SMEs in New Zealand: Structure and Dynamics’ report.