G'Day Justin Hogg from Right Source talking budgets and we've talked a lot about
mechanics of budgets and there's a lot of mechanical stuff you can talk about
the technical side of budget should you do one or not, no you don't need to do
one fYI and that's great there's a lot of data spreadsheet templates cool what
I wanted to talk about today was actually how would I do a budget so
best-case scenario how do I think a budget should be done and the right way
if you like and this is equally applicable to if you're a small business
just yourself running it through to a hundred million dollar company
the process is the same I think in how you should run a budget
process how you set your budget for the year so let's start so how would I start
a budget process the first thing I would do is make sure you're clear on your
goals there's nothing to do with numbers the first step, first step is what do you
want to achieve now I mean this both holistically from a big picture point of
view like is it your vision board is it a business plan whatever like where are
you going? What are you doing? What do you want to achieve long term, also I suppose
an idea of what you want to do as most budgets would like to do around the year
period so what what do you want to achieve in the next year
so your goals, resolutions, whatever but it's your 12 months goals where do you
want to be, be clear on that, that's the good starting point because then you
know wait going okay so once you've got your goals the next thing I like to do
is start top-down so don't go into the detail and really this isn't even about
what how are you budgeting yet this is about taking those goals and going okay
what are some of the high-level financial figures you want to hit so revenue,
margin, turnover, staff, whatever makes you know that mean something for you
in terms of where, helps articulate where you want to be in that 12-month period
do you want to increase revenue? Is that staying same? No staff, are you
changing locations? Those core assumptions around where you want to be
at 12-months time or what do you want happen over this 12-month period, now why
this is important irrespective of the business size that
you're in is it helps set that framework so before you get into the nitty-gritty
of doing your budget you already sort of conceptually know well this is the
number I want to hit doesn't mean you'll hit it but it gives you something to
work towards and a basis and to check whether you're thinking in terms of your
goals makes make sense and whether you've missed anything in the budget
process now if you're a small business it that can be quite quick and in terms
of the process for large business that has even more value because you can then
communicate to those others that are in the budget process okay we're about to
start a budget process but this is where we want to get to now some people say
well that's cheating because you're getting the answer before you start the
process but it's not cheating because it's not necessarily going to be the
answer but it gives people an understanding of where you are going
so it helps communicate that goal that way your traveling so that
everyone moves in the same direction when doing their budget process the next
is now you start to get into the budget proper and for this I always say spend
your time where it matters most so where does it matter most for a business? Well
for me a business won't run unless you sell things so you need to spend, in my
view, most of your budget time focusing on your revenue now when you look
at most budget content it's all talking about costs and how you manage your costs
your revenue is actually what drives your business so that's where everything
starts if you're not selling stuff you're not in business so to start a
budget you need to say well what am I going to sell? And how am I gonna sell it?
For revenue I tend to prefer doing a zero-based budget or effectively a
detailed budget around your revenue because you're going to want to look at
a lot of different things to understand it and it's really it's really a part of
the business that you should really understand so you're going to want to
look at things like who your current clients are whether you expect them to
continue or where you're selling what channels you're selling your goods
through and whether those channels will continue to be at the same levels
not, are you doing different channels but also your lead generation so when you look at
how much revenue you want to make for the year what does that mean in terms
of new clients or new channels or new goods how was that going to get driven
in terms of leads so if you are looking at a client perspective how many leads
do you need to get a new client or a new project you're going to want to be able
to capture that type of information because that will help understand the
drivers of your business and also what campaigns you want to run and
effectively will then drive your costs so that's a lot of detail work on
revenue the other thing with doing that I don't know if it's subconsciously why
we all feel a bit uncomfortable about doing revenue is that it can be quite
confronting like if you like yes we're going to grow the business off we go and
then you start looking at the numbers and go well I'm not sure where this is
all going to come from it can be quite scary so, and a lot of it especially
if you're looking to grow a lot of it is well we're gonna do you know do these
campaigns we're going to invest in these channels we're going to promote these
products it might not work so you're still hoping it'll work this is your
best guess and this is what you hope will happen so from that point of view
it can be a little confronting at the end of that process though you'll have a
clearer understanding of where you want the business to drive in the next 12 months
so that's spending your time where it matters most the other
area of your business which matters most is your people so
that's the next area that I would probably do a more detailed budget on in
terms of who's working in the business who you plan to have working in the
business, how much they get paid, bonuses, were you going to do bonuses?
And basically understand people you have and what they're doing and and do that in a
zero-based way or basically a detailed way so that way you really understand
who's doing the work in your business? Who is your business? Because your people are
your business so for those two steps: your revenue
and your people you've really got the heart and soul of your business in terms
of what your business is doing and who's doing it and who makes up the business
from there really that's the detailed areas, from there I
would tend to use an incremental budgeting approach for your cost of
sales there's your next step so look at your cost of sales
you've got your revenue you've already decided what you're going to sell where
you're gonna sell it, to work out then the cost of that is a relatively
mechanical process because you know what makes up your products and then
similarly with overheads I really would spend as, it sounds a bit odd, I wouldn't
spend a lot of time on overheads because they shouldn't change that much
yes definitely control your costs and make sure you're on top of your cost and
make sure you're not overspending in terms of money in overheads where you
don't need to spend it but that can be done more operationally on the ground
budgeting is about setting the benchmark of where you want to be so if you want
to say well I wouldn't mind chopping a little bit off my overheads this year
great take 10% off, put that as your budget, that's all you have to do
you don't need to go into the detail and understand how are you going to do that
in the budget process, that can be done operationally during the year in terms
of this is my target, this is where I want to get to, let's work towards getting to it.
once you've got that you then basically have your P&L budget you've
got your sales, your cost, your overheads your people are included that's your
budget, use both a zero-based and incremental to bring that together, now,
there's a couple more steps I still add on to here, the next one is build some
integrity into it, so what do I mean by that? Well your P&L is great
that's your performance now whether you can do that and what that performance
will end up creating is in your balance sheet so connecting your budget to also
have a balance sheet and a cash flow can be very meaningful and helps make sure
that your dreams in terms of your performance are actually able to be met in
terms of your capability, in terms of your assets and resources that you have
and it allows you to identify where you may need to go and get some more so it
gives that bit more integrity to what you're doing, the next step is then
you've gone through all this work you've built some integrity in it do the
numbers actually make sense to you? Because at the end of the day it's
your budget, this is your business, if these numbers don't make sense to you
what's the point so the numbers that you get in the budget need to be meaningful
to you or need to be what you are happy with in terms of a target for the
business now this comes back to a high level targets that we set at the start they
may not be the same and this is where a budget process can help you learn in
terms of what your business is capable of doing so you might say I want to hit
you know a 20% growth for the year blah blah blah great you do the budget in
terms of what you're planning to do and it comes out, so well
realistically 10 to 15 percent growth is what's going to be achievable and what
you're comfortable with the budget well then that that's cool so that's where
that high level number then changes and you need to at some point go at the end
of the budget process confirm that they are the numbers that we're hitting
for the year, they are the budget, lock them in, they're done. The last step is use your
budget, a budget isn't a once-a-year thing it should be something you use
throughout the year if you're not going back and reflecting on how your actuals
are traveling and how you're traveling in the business based on how you hoped
to go or how you budgeted you'll very quickly come off track and all that work
you've done in the budget actually doesn't have any value, the value is in
using it so in using that budget to help be that signpost to make sure that at
the end of 12 months you've hit the goals or you're on track to hit the goals
for those twelve months and you're on track to hit your long-term goals for
the business, so that's it, that's how I do a budget from start to finish
now as I said there's a lot of technical stuff we've got on the YouTube channel
and we've done videos on before so definitely check that out if you want to
understand the the technical aspects of doing a budget if you want some help
bringing your budget process to the next level definitely feel free to get in
contact, chuck your details below put it in the description what you're after or
feel free to connect with me on LinkedIn happy to help, help you enjoy budgeting
and create value to your business because that's what we're all about
so thanks again for watching and again it's Justin Hogg from Right Source,
Catch you next time!