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

ON your business rather than IN it.

Interview with guest

  Charmaine Chalmers, Accountant at Abby Practice

www.abbypractice.com.au

We’re very excited to be welcoming this week Charmaine Chalmers, a top accountant from Abby Practice. This is Part two of Budgets and Planning which we started a couple of weeks ago when we had Sid Edwards on the show. Now, if you missed it, don’t worry, you can always catch up on my boydofficemanagement.com.au website at the Podcasts Link.

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 Abby Practice on the show is, (and I have mentioned this before) this interview is based on a fantastic Small Business workshop held at there 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 Charmaine and thanks for being on the show!

Let’s firstly go over what we covered a couple of weeks ago with Sid:

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

  • 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
    • Insurance Companies / Legal
    • You
    • Others – if you are selling your business

Types of budgets

  • There are 4 financial budgets for businesses:
    • 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)

Constructing a budget

Start at Revenue…

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.

And now your expenses…

Achieving the result

Is it sensible / can you achieve this result…

  • 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 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?”

Part 1 – Use of a Completed Budget

Last week we established that the purpose of a budget was to

  • Set out in financial terms the management’s expectation of the future financial operations of the entity

It is the comparison of Actual versus Budget that is the key aspect of the use of a budget…

(Charmaine to explain here)

It is a simple matter to introduce the budget figures into the accounting system on a monthly basis. Thus when one of these systems prepares the monthly reports, it shows the budget figures alongside.

Once a business owner has the comparison to budget, it is easy to pick out the accounts that are not close to the budget amount (note the use of “close to”, what we are looking for is major changes from our earlier expectation).

The reasons will be many and varied for the differences. As examples:

  • The expense was planned for this month and will occur next month (no further concern).
  •  The expense was planned for this month and has occurred but is twice as much as the budgeted amount (here is an area for concern – is the budget wrong, why has the overspend occurred, are we going to achieve the expectation we set when we put the budget together?
  • The same analysis can occur with the revenue line of the statements.

 THEN Quick Action is the key…

What we have been able to achieve by having a budget is to focus our attention on the problem raised by the difference to budget (our expectation). The business owner has not waited until year end for his accountant to tell him he is losing money.

The various account codes that are on, or about budget, are not examined in detail as they are within your expectation. The idea is to only work on account codes that are different from your budget and may need your prompt attention.

The key to this whole process is to enable quick action to be taken to change what is occurring if that is not what we want as a business owner. The budget is the figures that have enabled the business owner to put his effort where it needs to be in the management of the business.

It is not the fact that there is an over or under budget situation, it is why that situation occurred and what action (if any) may be taken to fix that situation.

Part 2 – How can your accountant can help with this…

Setting up a process such as monthly management meetings to review Actual vs Budget figures is a crucial part of managing your business and one that Abby Practice can assist you with if you wish.

 What are Rolling Budget / Forecasts?

In many organisations it has been found that an annual budget is too inflexible. Sometimes budgets are set many months prior to the start of a financial year and are out of date before the year starts. This of course points to the major problem with any forecast of a budget that is prepared looking into the future.

The concept of a rolling budget is that it is always changing to meet changing circumstances. The budget is constantly being updated to take account of the new circumstances.

Whilst we don’t advocate that an SME would use a full rolling budget method, what we want to show is that a budget is not locked in stone. Thus, should your budget be found to be totally incorrect, then that budget could be adjusted to something that more closely resembles the actual operation of the entity.

The rolling idea for budgets is ideal to continually update a monthly cash flow forecast with your latest data. You may find that you carry out this task in your mind on a weekly basis or monthly time horizon. We would suggest that the rolling cash forecast be prepared approximately three months ahead to locate cash flow problems in advance. Many businesses have a cash flow problem at Christmas with the payment of holiday pay and other expenses without income being generated in that period.

Part 3 – Conclusion

The budget is a tool to enable the business owner to quickly identify income and expense items that are not in line with an expectation generated earlier in the financial period. The budget process itself provides you with an opportunity to review your figures. We often find that new ideas come out of this process for cost savings or better ways of running a business. Take care with ideas of cost cutting, often a change in supplier will achieve the saving but be careful this saving does not force costs into your budget or running costs in a different area.

We should not confuse actions of target setting and goal setting within a business with the act of budgeting. Generally a budget is achievable (only just) where as a target or goal setting will be something that must be stretched to obtain.

The budget process is one of the few occasions in which a business looks at what it has done in the past and what the future may hold.

We commend the discipline to you as a business person. Should you wish to have our assistance in this task we are happy to assist.

Next week’s show

Next week we’re going to have a chat about Personal Branding and why it is so important to building your client base, your network and your referees.

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

Homework time!! How do you present yourself to clients (and remember a client can be anyone, really) and what’s one aspect of presentation you could improve?