We know budgeting can seem like a chore but it is just so essential. So we’ve given some thought to some tips that may help in preparing your next budget.
1. Use Xero
Xero contains a budget template which enables you to keep track of your budget when compared with actual revenue and expenses. We refer to this as variances. Xero keeps track of everything so that you don’t have to update spreadsheets and the reports are “real time”.
Go to Reports > Budget Manager. You’ll be able to enter revenue and expenditure for the year ahead and then track variances. Xero have a helpful video available here.
If you don’t feel confident using Xero, we are able to do this for you.
2. Understate revenue, overstate expenditure
One are that often catches people out is being overly optimistic when forecasting revenue. We have seen clients who apply an arbitrary percentage onto their sales for the year ahead. They are then very disappointed when the forecast sales don’t eventuate. Remember, even if you are winning new business, you may be losing existing clients. This is called churn and you should plan for it.
Expenditure has been pretty consistent for many businesses over the past few years with the economy in recession. As the New Zealand economy is forecast to grow quite strongly over the next few years, we think you should be planning for some increase in expenditure. It may be that some of your suppliers will be looking to get some revenue growth by putting up prices and those wage and salary increases may not be able to be put off much longer.
Whatever your situation, be realistic when setting your budget for the year ahead. It will help you to focus resources and energy.
3. Review Suppliers
Its important to review suppliers annually. Increased costs are not automatically bad so long as they are aligned with increased value. Have a look at your top 10 expenses that can be controlled to some degree. See whether there are is an opportunity to ask an existing supplier to review their pricing. This is far preferable to sourcing new suppliers as there is no down time involved.
4. Understand Variances
If you were involved in a large business, you would have to produce monthly reports. This would require you to review the budget for your department and report to your manager or the Board. For many of us in smaller businesses, we are the Board so the concept of writing a report to yourself is a little meaningless. Nevertheless, you should at least review the budget at the conclusion of each month to determine:
- Did you meet your revenue goals?
- How is revenue tracking against budget for the year?
- Are expenses in line with your forecast?
- What are the variances and what action can you take now?
A little time spent reviewing the budget at least monthly will ensure that you don’t have any nasty surprises down the track. Whatever you do, don’t put that budget in a virtual bottom draw.
5. Know your Break Even Point
One of the most essential figures that you should know is your break even point. This is the point where you start making a profit, or put another way, the goal you need to reach to stop making a loss. This is really easy to work out if you have a budget. It’s the point where revenue = expenses. There is no profit or loss and you have “broken even”. We cannot overstate the importance of knowing this number. Some businesses break this down to weekly or even daily amounts and it helps keep them focused. If there is one financial metric you should follow in business, this is it.
Generate Accounting offers budgets from just $480 + GST. If you would like us to set you up in Xero for the year ahead, just give us a call.