The thing about budgeting and financial reporting…
Would you go on a journey without an itinerary? Would you travel without knowing what planes, trains or boats to catch? How much time you would have in each place, or how much money you would need to complete your journey?
Would you travel without knowing where you were, or where you should be, and where you should be going to next?
Would you just carry on travelling if you knew there were pitfalls, like cancelled flights, or hurricanes, or pirates, ahead, without making alternative arrangements?
Would you continue travelling if you had no idea how much money you had left, or if you would be able to afford accommodation and food?
And yet, we do that in business.
We start our journey without an itinerary – without a budget, telling us wherewe want to go, and when we want to get there, how much money we will need, or what we will need to do to complete the business journey safely.
We travel without knowing where we are – we don’t get regular profit and loss accounts and cash flow statements, and, often, when we do, we get them so late that they tell us where we were, not where we are. Too often, if we get them, we don’t give them the attention that we should, and have a cursory glance at them without the proper analysis they need.
Without the analysis, we are unaware of the pitfalls ahead – we don’t know if we will have enough cash to pay the wages or the BAS, or if our failure to pay our suppliers could lead to them cutting off supply.
Too often, when we get financials, they are not compared to budget – either because there is no budget, or because our reporting doesn’t do the comparison – so we don’t know whether we’re on the right track or not.
Not knowing if we’re on the right track means that we travel on regardless, without taking the corrective action that needs to be taken – and wonder why we get a rude shock at the end of the year when the results aren’t what we wanted.
The first step to remedying this situation is to prepare the itinerary – a budget for the year ahead. For many of us, creating a budget seems to be a daunting task. It needn’t be. There are simple ways to create a budget, based on previous years’ trading. Your accountant, or your bookkeeper, should be able to help you create a budget for your business. If they can’t help you, perhaps it’s time to get new financial advisers.
Once you have a budget, you have a standard against which your actual performance can be judged – you have your itinerary. You will know where you should be each month, what milestones you should have reached, and what you should achieve by year-end.
The next step is to ensure that you get your financial reporting right. You should get a profit and loss statement, a cash flow statement and a balance sheet for your business each month, by no later than the 10th of the month. This will allow you to see where you, in fact, are. If the report is later than the 10th, you will know only where you were – and that is too late to turn the wheel to get back on course.
If you are to be able to check that where you are, is, in fact, where you wanted to be, your financials must be compared to your budget. Again, this is not difficult. Your financial adviser should be able to provide you with a good report, comparing actual performance to budget, in a simple format – showing the variance against budget in both dollars and percentage. To make it even simpler, the figures could be displayed in colour – black for favourable variances, and red for adverse variances.
This comparison is absolutely essential, and there should be no excuse for failing to provide it. In fact, your adviser should be able to give you a comparison to both budget and to last year – which will give you a really good idea of how you’re tracking.
Now you’re getting a financial report by no later than the 10th of each month, comparing your actual performance to your budget and to last year.
You are in control of your business. You can see where you may have challenges, and you can start to take the corrective action needed.
The chances of you reaching your destination – your budgeted profit – have just increased exponentially.