Business Matters – Page 2

What is a budget and why do you need one?

A budget is a vital tool for business success. It can help you meet strategic objectives, make good financial decisions, expand the business, benchmark performance, determine operation costs, fund present and future operations, understand the revenues needed to support the business, obtain a realistic estimate of likely profits, control cash flow, allocate resources appropriately, get a clear idea of start-up costs for new business, and so on. If you don’t have a budget and don’t budget correctly then you could end up spending more than your income or spending too little and so hindering the growth of your business.

Top tips to creating a budget

Set aside quality time so that you can put in the required effort.

Consult and involve people with financial responsibilities or expertise who can help you draw a complete financial picture and review your budget.

Create a mind-set where you’re all realistic, flexible and proactive.

Consider whether one overarching budget or several separate budgets are needed for different departments or scenarios.

Develop a budget action plan so that you know what you are doing and when.

Establish a system that ensures you get the right information for your budget so that you can monitor the key drivers of business such as sales and costs.

Research and purchase any financial software that you need.

If you’re already in business, use last year’s figures on sales, profits and related costs as a guide.

If you’re just starting out, get an idea about figures from others in the same business or of the same size or do market research for example by contacting suppliers for quotes.

Consider your sales plans and sales resources bearing in mind economic conditions and your competition.

Prepare sales or revenue forecasts based on things like past sales history but remember to err on the side of caution and to bear in mind market conditions.

Factor in any one-off capital costs and establish your fixed costs, these include rates, rent and salaries and generally stay the same irrespective of how much or how little you sell.

Variable costs rise and fall in line with your sales – they might include costs for extra staff or raw materials – find the link between the two and use your sales forecast to project variable costs.

Identify the break-even point –the level of sales where you neither make money nor lose money – it helps identify the volume you must sell to avoid losing money.

Work out non-operational cash flow like taxes and financing.

Using historical or research information work out income and expenditure patterns.

Prepare your one overarching budget or all your budgets.

Discuss, adjust, agree and update regularly the budget with all responsible parties and accept that economic and competitive and business conditions will mean that changes will occur and will have to be incorporated.

If training is required on any of the topics discussed in this article, please have a look at our customisable Finance for Non-Financial Managers elearning courses.

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Try this at your next meeting: when your financial colleagues start talking numbers watch everyone’s reaction. Ten to one you’ll see panic or boredom or a mass exodus from the room. What many managers may not realise is that people who are switched on to finance make business better for themselves and for the company.

Boost your credibility

Imagine you’re at that meeting again and this time instead of running for the exit you use your training in finance for non-financial managers to engage with the accountants. Maybe you question their analysis or put forward your own proposals or make your own decisions. Whichever you do, you’ll find that because you’ve backed up your position with figures and facts you’re more likely to win the support of other colleagues.

Do a better job

Whatever kind of manager you are and whatever kind of industry you work in finance will play a part in your life. At some point you’ll have to read balance sheets, analyse spread-sheets, record financial information and assess ROI. Finance is an intrinsic part of business and if you don’t understand it you aren’t able to play a full part in the organisation.

Understand fundamental financial terminology and concepts

Did you know that the average Joe (or Joanna) knows up to 50,000 words and uses up to 10,000 in every day speech? Amazing! Our guess is that you would be less surprised to learn that those 50,000 don’t include asset turnover flowchart or sensitivity analysis. The definitions and concepts behind these and other terms are nevertheless essential knowledge for every non-financial manager who wants to have meaningful communications with all colleagues and to make informed decisions.

Read and interpret financial statements to make effective decisions

Just as a doctor must understand medical records to assess patient health and progress so managers need to be able to read financial statements to assess how well a business is doing. Financial statements form the basic structure of performance measurement. Ignore them at your peril!

Gauge impact of decisions on financial performance

All managers know the importance of the bottom line but not all know that every decision can have consequences for the bottom line. So it’s only good sense for managers to have the know-how to estimate the likely financial effects before and after decisions. Remember that financial performance informs partners, investors, competitors, stakeholders and many more on how your company is doing and determines their reactions.

Understand the basis for evaluating investment decisions

Whatever kind of business you’re in you will need to invest money to generate future profits. It goes without saying, therefore, that investment decisions require the evaluation of costs, benefits and risks in order that managers can make the right choices. Bad investment decisions can cost you and your company more than lost opportunities.

Communicate effectively with financial colleagues and specialists

Communication is a two-way street. As a manager you will need to understand finance in order to influence the board, persuade partners, implement decisions, set expectations and question accountants and financial managers by way of charts, graphs and tables and with reference to financial information and targets.

Use a range of financial tools when making decisions

By understanding and employing the correct financial tools you will be able to examine the factors that affect the figures and be able to ask the right questions so you make the right decisions. Don’t worry – you won’t end up with more tools than in your garage tool box; a good finance course will cover what’s necessary in the language and detail that you need.

Prepare for the unknown

Forewarned is forearmed as the saying goes and getting a firm grip of your financials will stand you in good stead for dealing with eventualities such as changes in competition, customers, economy or legislation. When you understand finance, you understand one of the main anchors of business and you can deliver results.

Browse our library of customisable Finance for Non-Financial Managers eLearning courses.