Happy New (financial) Year
– welcome to bottom up budgeting
By Chris Young*
IT’S that time of year again. The majority of Australian businesses will be finalising their end of fiscal year results and looking forward to the year ahead.
The same way many use January 1 to set personal resolutions, the fiscal New Year is a great opportunity to take stock of business performance and set targets that will lead to a prosperous and successful year ahead. The ideal tool for such an exercise is your 2010/11 financial year budget.
Small business business owners generally spend less time looking at their p&ls and budgets compared to their corporate counterparts.
One of the main reason large corporates often require lengthy monthly reporting from their managers is to ensure they are taking the time to analyse the performance of their business and plan for the future.
Taking the time to complete your budget for the next 12 months is a great way for you to ensure you are working on your business, not just in it.
Five Benefits to Budgeting
• Planning – Most of us are very busy with our day-to-day activities and may avoid formalised planning unless we are made to do it (bank applications etc). If a budget is in place it allows business owners to focus on problems before they actually occur. Daily distractions are therefore reduced, because knowledge of possible problems allows you to act in advance, rather than having to ‘fire-fight’ problems as they occur.
• Organising – A good budget helps utilise your resources such as staff time and your own time in the most beneficial way for your business.
• Controlling – Once the budget is in place it allows you to more accurately control your expenses. Investigating variances from established targets (ie differences between actual and budgeted) and taking corrective action on a monthly basis will improve the profitability of your business and your confidence as an owner.
• Communication – Your budget is a great tool to use for discussing performance and targets with key staff members as well as other key stakeholders in your business.
• Motivating – Not only can the process of setting and achieving targets be very motivating for yourself as a business owner but it can also be a good tool, and the base for engaging key staff and setting incentive targets that will benefit the business and the employee.
When advising our clients on budgeting we recommend the “profit based” methodology, sometimes referred to as bottom up.
In other words, establish an end result that you would be happy to achieve and then build a budget that will drive business performance to produce the desired result.
The benefit of this approach is that you are letting the profit result you desire dictate the rest of the budget, as opposed to starting at the top and working your way down, where the existing sales, yield and expense patterns dictate a profit result for you.
Bottom up budgeting is far more likely to achieve real change in your business and help you build a business that is profitable and benchmarks well against others.
A word of warning though: unrealistic budgets will not benefit your business, or motivate you. If your ideal result is still far from your present performance, set achievable targets that will get you where you want to be in the longer term.
When trying to “adjust” your budget to achieve the bottom line result you desire there are three key factors you should take into account.
It is unlikely that you will be able to achieve significant change in the financial performance of your business without impacting at least one of, if not all three of the following:
• Volume – If your level of sales isn’t where it needs to be then your budget could be a case of “Moving deckchairs on the Titanic”. If the numbers are just not stacking up consider whether it is simply a result of not having sufficient volume. As a rule of thumb any travel agency achieving under $3m in sales should focus the majority of their efforts on building volume.
• Margin – Every business is different and will therefore have a different margin. It is important to use benchmarks to have a good idea of where your margin should be based on the type of business you are, and your sales mix. Once you have this information you can use it to set a realistic target in your budget.
• Productivity – Your biggest expense will no doubt be staff. They are also the key to your success. The most important staff indicator is not staff expenses but productivity. Setting productivity targets such as “cost of seat” should be part of the budgeting process.
Final Thought: Budgeting is a time consuming exercise that can’t be rushed, however you will find that the benefits of having a budget in place will far outweigh the effort you have to put in.
Do whatever it takes to make it a relaxing and enjoyable experience (Yes, that is possible!). Perhaps that will mean doing it with someone else, a good pot of coffee or a good bottle of wine.
Good luck and Happy New Year!
This article appeared in the June 2010 issue of travelBulletin