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Small H only 111x74

Small Biz Matters – a half hour program each week where you can work

ON your business rather than IN it.

Interview with guest

  Sid Edwards, Principal at Abby Practice

www.abbypractice.com.au

We’re very excited to be welcoming this week an extremely experienced dare I say towering pillar in the Hornsby Business Community; Sid Edwards from Abby Practice. Abby is a progressive, entrepreneurial accounting practice which can contribute ideas to help you to improve your business. They’ve been based in Hornsby for over 25 years but have generously give us their time to chat about Budgets for Small Businesses and why it is so important for them to have one. ….

The reason I have invited Sid on the show is, (and I have mentioned this before) this interview is based on a fantastic Small Business workshop held at Abby Practice recently, and I felt it was invaluable to all our small business owners out there so here is Sid to share his wealth of experience with our listeners!

Welcome Sid and thanks for being on the show!

 Part 1 –

Why is it important for Small Business to have a budget?

(conversational)

  • The Budget is all about the future of a business or organisation. It is one of the few financial documents prepared by accountants to look to the future.
  • Who is interested in your budget?
    • Banks are interested in the future operation of your business and the ability of the company to repay the loan made to them
    • Insurance Companies / Legal Actions because budgets can form the basis of your claim against others for actions they have taken that may have damaged your business operation in some way
    • You – Your budget is your personal business plan for the next month of financial year. You can track that your business is moving in the direction you planned. This is particularly important for new businesses where you need to monitor closely the performance of the business.
    • If you are selling your business you need to make sure your budgets are up to date! You are telling the prospective purchaser how the business will run into the future and if the business will be profitable

Types of budgets

There are 4 financial budgets for businesses: (Sid to explain these each briefly)

  • Trading Account Budget – follow the format of your financial reports
  • Profit & Loss – follow the format of your financial reports
  • Balance Sheet Budget
  • Cash Flow Budget – strives to estimate the entity’s bank balance at the end of an accounting period (banks want to know about this)

Part 2 –

Constructing a budget (now this is the first time I’ve had anyone explain this to me and it actually makes sense!)

It is clear that the easy way to generate a budget is to take a look at last year’s figures and add on a percentage for inflation. This is really a waste of the budget process. We believe to start your budget process you should:

    • Set a figure that you believe will be the inflation of the next year. In general terms your income and costs will move by at least this figure. Imprinting on those figures your physical plans for the business, the budget starts to become a live document.
  • However, to progress a business must do better than inflation either by increasing income or reducing costs; and
    • Set a sales’ target that is not related to sales, say, units sold, jobs completed, hotels have kegs of beer, newsagents a number of newspapers etc.
  • With a couple of key indicators of your business set you can now begin to construct your budget.
  • We see the budget process as a review of each line item in your budget. Do not have too may line items or you will become lost in detail.

 Start at Revenue…

  • We see the revenue line as the natural starting point of your process. Your expenses must be made to fit the revenue you plan to enjoy. Start with last year’s sales figures and deduct from it any special sales that you may have made such as a one-off contract during the year, or the end of a contract that has not been replaced. Then to that figure add the result of plans you have for the next year. You may have won a contract part way through the previous year and you can now introduce the full year effect into your revenue figures. You should also allow for the effect of inflation on your sales results. The result of these calculations should be a figure that removes any effects of the prior year and adds in the plans of the current year.

A word about our calculations…

  • The figures in the calculations don’t have to be down to the last $1 of accuracy. What we are looking for here is the general idea of the affairs of the entity.
  • It is the principal reason of why the revenue has gone up or down that is the informative fact that is important to the management of your business. It is handy to keep notes of how you have arrived at the recorded figures (again in general only). It is to these notes and calculations that you will return to work out why your expectation of revenue for the next year has or has not been achieved.

And now your expenses…

  • Having calculated a revenue figure, it is now possible to use the details of your sales to establish what you may need to achieve those results. In simple terms, you must fit your expenses against the income you have calculated you will enjoy. As you start to match your income with your expenses you will start to see some of the hard decisions you may have to make. It is that old saying “you must cut your cloth to what you have”.   For example:

An additional person to handle the XYZ contract that will start on 31 October. Thus the salary expense for the year will need to be increased by 2/3 of a person in this year. If this employee needs a vehicle, account for increased costs for an additional vehicle for the period. But if the income of the new contract does not flow to you of say 3 months, how can you finance this new contract?

  • In a similar manner you may add in an additional staff member for say four months for the rush time you may have in your business cycle.
  • Work your way down your expenses list looking quickly at what you will do or what effect will occur that will change that expense item. The purchase of a new vehicle should see repairs and fuel consumption drop, however the business will have a larger depreciation cost and may have an interest or lease cost on the new vehicle.
  • Some items will not be affected by the level of business volume whereas others such as telephone use, will. Rates on a property, for example, will only be adjusted up by your estimate of inflation for the year.

Part 3 – Achieving the result

Is it sensible / can you achieve this result…

  • Finally you will have calculated revenue and expenses items in your budget. By deducting expenses from your revenue you calculate a budgeted profit or loss for the year. Carefully look at this figure.
    • Is it the figure you were expecting to calculate?
    • Is it wildly at odds with the actual results for the past year? Can you see why you have generated this result?
    • This may be the first signal that either your budget process is incorrect or your business is moving in an acceptable or unacceptable manner.
  • To budget to make a loss requires the business to really think about what is happening in its industry. We believe the only time a budgeted loss is acceptable is when a business is moving to a new and profitable operation.
  • Use this stage of your budget as a sensibility check of your process. Have you been too aggressive with your ideas of revenue? Are the expenses you plan to incur giving the benefit you plan?
  • If the budgeted profit or outcome is not what you wish, you may need to go back and review your ideas for the future. It is during this phase of the budget work that you must ensure that you remain objective. You must have a good idea of what is going to occur to make your sales etc. change. It is easy to write figures on a sheet of paper and hope. It is much more difficult to put those plans into action.
  • This review of your calculations is in our opinion the most important function of the budget process. It is at this point you must say to yourself “is this achievable or is it too easy, should I try for more and how will I do it?”

Now the really exciting news is that we will have another representative come on Small Biz Matters in the coming weeks to help us through Part 2 of Budgets for Small Business, so in fact, this is another special guest we look forward to welcoming back soon!

Thanks Sid for being on the show!

Next week’s show

Next week we’ll have another fabulous special guest – the extremely experienced Lester Langford, owner of Aspiring Computer Services. And let me tell you this is the first time I have spoke to an IT expert who has made the whole process of setting up your office CORRECTLY from an IT perspective seem so simple! Actually it’s not otherwise we’d all be capable of doing it ourselves as small business owners. But seriously I’m excited to have him on the show to help make sense of issues like server setup, cabling and the wonderful (and for me very confusing) world of IT

As always, if you’ve only just tuned in you can listen again or in touch via the Breakfast Date Facebook page or email me at alexi@boydofficemanagement.com.au

Homework time!! A challenge question for you all: What would you try to tackle first if you were making the big move from a home office into your own commercial premises! I can bet you it’s the wrong thing…