Budgets – Simple or Complicated?

Most people owning or managing businesses don't have financial backgrounds so the thought of a budget process is quite daunting. As a management accountant I know what it's like to work with clients that aren't confident in this sort of thing.... it's the reason I work with clients that aren't confident in this sort of thing!

There are services out there that can help and a fairly short discussion about budgeting, in plain English, can give an idea just how simple or complex your budget needs may be. When a simple budget is needed, there's no need for you to have any great expense in getting anything more complex to have a budget for the year ahead. And similarly, when your budget needs detailed work, don't try relying on software that cuts corners to do it for you, or trying to save your pennies by using someone not qualified and experienced as there may be more complexities you may simply not be aware of. Typically, the work to be invested in your budget preparation is reflected in the size of your business, it's activity and plans for growth, and in the potential risk ahead that the budget may help address.

One simple method for setting a budget can be to look at the previous years figures, and use these again, possibly with a small percentage increase or minor adjustments to some or all accounts. It's a very simple approach and can be a starting point. From there, you want to think about what can be different in the year ahead and what the financial impact will be.

This is where I recommend getting an experienced professional. The simplistic start is not necessarily so enough without knowing how accounts are impacted, and the timing of that. I know when I prepare a budget I usually include a monthly cashflow forecast within it for the year ahead. Making a bottom-line profit is certainly important for a business, but just as important can be the timeliness of cash coming in and going out as that can cripple the most profitable of businesses if not properly managed. So... knowing how to set the timing of your ambition and expectations for the year is important, and how this affects your chart of accounts so you can have plans in place for any time things might become tight, or see opportunities where savings could be made.

And of course, there can be more complexities than just the accounts and timing of activities. Your actual expectations may have more in depth elements, such as new contracts ahead, or even contracts ending, plans for marketing activities or to expand and buy new equipment or bring on more staff. Understanding how your future plans will result in transactions, and then when and how those transactions will impact on your accounts... your bank and cash, your assets, liabilities, your profit and loss accounts and the bottom line will give you a great tool for keeping on track and knowing what decisions and actions may need to be made before it's too late. I don't find this a difficult thing at all myself, but I have been working in this area for over 15 years so my best suggestion is finding someone that is comfortable with this to help and you can take the complicated out of the complexity.