Why Do You Need a Budget?

Why Do You Need a Budget?

  • Posted by Kathleen Tierney
  • On June 29, 2016
  • 0 Comments

Recently a client rebuked to me “Kath, stop telling me I need a budget, I need a forecast, I need these things to run my business.”  So I said, “Well, you are right. You don’t need a budget or forecast or any of those things to run a business”.  And then I went on to say, “However, let me put it this way, I strongly suggest that you use a budget, a forecast and those sort of things to run your business better”.

How to Measure Profit Margins & Performance

My client has been conducting a successful business for over five years and on the surface it seemed like it was buzzing. Clients wanted more, staff were dedicated and the owner was creative, innovative and relaxed.

However, when I first starting working with the owner and his business, it became quickly evident that he also was struggling with cash flow especially when it came to paying quarterly BAS and other lump sum tax payments.  A few more conversations and it was apparent that his staff were frustrated with lack of positive feedback, guidance and direction from the owner.  They each complained that the owner didn’t trust them or value their individual contributions to his business, and they didn’t have budgets, nor did they know how much they could spend on capital improvements

On the financial side, the owner knew his profit margin had dramatically shrunk over the past two years, and that his supplier costs had gone up but hadn’t factored that into any flow on impact into his own product pricing – he hadn’t increased his prices for over two years. He also knew that utilities bills had also increased substantially over that period of time as had salary and wages.

The Budget as a Management Tool

Business Embassy actively worked with the owner on a number of different aspects of his business. We streamlined his bookkeeping and clarified roles/functions; set up weekly team leader meeting in which the owner would give updates, discuss his ideas, and agree to upcoming priorities.

We also set up meetings with each of the managers so they had the opportunity to dialogue directly with the owner and engage in two way communications. At times, we would be part of those meetings and sometimes we had to step in for the owner when he wasn’t available. This meant that the momentum was kept up and the team leaders were encouraged and supported.

Costs and Opportunities for Growth

We sat down with the accountant and bookkeeper to set up and obtain fundamental budget and costing information and reports. This information enabled the team leaders to cost the products and to manage their operational costs. Until now, the product line had not been costed – ever, to take into account the actual costs of production per item

We guided the owner through discussions with employees who were not performing, and assisted the decision making and implementation process for bringing in new staff or letting some go.

After six months of our working with the owner, we reviewed the financial numbers.  Whilst we had been told the business was at capacity when we started working with the owner, it was clear that the specific improvements we introduced delivered a 20% increase in revenue and substantial positive impact on the profit margin.  The cash flow was now smooth and there was cash in the bank sitting ready and allocated for future payments.

The business is now ready for the next step – and that is, to expand and double its capacity.  As the business mentors, we’re working with the owner to achieve this future growth.

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Business Embassy works quickly and efficiently. We have years of experience and practical templates to get the budget and cash-flow started.

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