Advice

How to budget for 2012

The secret to great budgeting is deciding where you want the business to be in three years' time.

The start of the new financial year is the ideal time to step back and start setting your business plans, strategies and budgets to ensure your business achieves its long term financial goals.

Questions business owners need to ask themselves are:

- What would you like to be turning over?
- How much profit do you want to be making?
- How many products or services would you like to deliver?
- How big do you want your team to be?

Once you know these things, you work backwards to determine what you need to do in the next 12 months to achieve this longer-term vision.


Budgeting is more than just numbers

A budget breaks down the things that drive the business, like sales, cost of goods sold and staff performance, and puts targets around them so in the end you have a plan to reach your ideal financial outcome.

A good budget will estimate the fixed costs that need to be covered to break even and forecast the revenue and associated variable costs that achieve the profit goals for you as a business owner.

One key element many directors forget to think about is their own personal financial objectives and ensuring these are aligned with the business’ budgets and plans as many directors rely on profit distribution for their personal wealth.

Working backwards and setting realistic goals

A computer retail business with two partners that is selling computers and parts has revenue of $500,000 p.a. with a profit margin of 25% - in other words their direct (variable) cost of each product sold is 75% of the sale price.

Their $500,000 turnover delivers the two partners a $125,000 profit margin. Which means, with a fixed cost base of $120,000 p.a., a maximum annual profit of only $5,000 is achieved from the business.

This financial year the two partners need a profit of $100,000 each ($200,000 total). By working backwards they calculate they will need a gross margin of $320,000 (instead of the current $125,000) and $1.28 million in revenue to generate their target profit.

Recognising that this sales target is unrealistic for the business, the better option would be to increase the profit margin from 25% to 30% which would reduce the revenue target to $1.07 million.


Current position

Budget based on 25% margin

Budget based on 30% margin

Revenue

500,000

1,280,000

1,066,667

Direct costs @75%

(375,000)

(960,000)

(746,667)

Gross margin

125,000

320,000

320,000

Fixed costs

(120,000)

(120,000)

(120,000)

Profits for owners

5,000

200,000

200,000



To get real benefit from a budget you need to be reviewing and comparing your actual figures against the budgeted figures every month to keep the business on track to achieve its targets.

Reviewing each month helps you to be agile, make more informed decisions and ultimately reach your goals, instead of the alternative which is to run the business blindfolded.

Complete the Azure Group’s financial management survey and you have the chance to win an iPad 2. To view the survey, visit the Azure Group website.
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