CFO Secrets: Effective budgeting for SMEs
by Gemma Shayle
Budgeting and its related processes can often be an overlooked task in a start-up or small business. Everyone is working at capacity and it’s one of those items on the to-do list that can easily be left on the back burner! It’s tempting to put off budgeting for another day (and another day, and another day…) but, if you budget effectively, you can do more than take control of your finances. You can get real, useful insights into the future of your business to plan growth and achieve your overall company goals and objectives.
So, how can a business budget effectively? A budget is most effective when all its budget holders work collaboratively alongside the finance function. The more involved budget holders are in creating their budgets, the higher the likelihood they will be engaged in the whole process and indeed be inclined to work harder to ensure budgets are met and exceeded.
Getting started
Although budgets are a forecast of expected income and expenditure, we can use historic performance as a baseline to check assumptions we are making when producing our budgets. It can be difficult to predict future revenue especially for businesses working on a project by project basis. Gross profit margins can vary between projects. Overspending is often inevitable when staff need to meet a brief and just get things done.
Past data can be a great starting point for your new budget. Due to the increase of artificial intelligence and automation within finance, budgeting is more insightful and accurate than ever before. However, there is always an element of uncertainty to consider, especially for new businesses who haven’t yet accumulated any past data for insights on expected performance, or those entering a new market. Even the slightest change within a small business can impact the financial future of the company. For example, government legislation changing minimum wages or pension contributions which are out of your control need careful consideration and planning.
Understanding the risks
It’s crucial to understand your current situation and, so, be able to pre-empt any risks in your business model. There are always unexpected costs that arise throughout the course of operations and having a contingency within your budget can help absorb these risks. Preparing your budget with these unexpected costs in mind, (such as equipment needing to be repaired or replaced) will keep your planned expenditure as realistic as possible. Once a stable yet realistic budget has been agreed, the regular monitoring of progress against this becomes critical for the full process to be effective.
Keeping on track
Producing budget vs actual reporting can highlight variances at an early stage to give a company opportunity to address what has caused any overspend or difficulties meeting the revenue forecasts. This constant check against budget proves to be a valuable piece of management information to monitor financial health and performance for company owners, shareholders, budget holders, the finance team and wider business.
Change is the only constant
Budgets are never static, they evolve and change over time. By re-visiting your budget at regular intervals and adjusting it accordingly, the more accurate your budget becomes. This will enhance the power it gives the business to make those important financial decisions. So, what are you waiting for?