Is this Business Viable?

To find out if your business is financially viable you need to establish your break-even point. To do this you'll need to set out a Simple Budget - containing all the known costs of running your business, producing your product or delivering your service. Admittedly, this is not as much fun as brainstorming marketing tactics - but it's essential to have a clear picture of what income level you're going to need to achieve to pay for everything.

"Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline."

Jim Collins, bestselling author of Good to Great & Built to Last

What are the key benefits businesses can gain from a good budget?

• A budget helps you to determine a break-even number therefore providing a target to aim for each month.
• A regularly reviewed budget enables you to compare against actual performance and quickly identify losses and take remedial action.
• Preparing a budget provides an opportunity to think about what you are going to spend and set limits for the business owner and staff.
• A budget allows you to plan operations and gives those responsible a better handle on things.

• A Budget is required for lending and demonstrates good management.

How should businesses approach budgeting

Growing your business requires financial as well as strategic planning. The first thing is to actually have a budget. Sadly, very few small businesses have one - which could account for part of the reason why so many new businesses don't survive. The excuse we often hear is,

“I don’t know what my income will be, so how can I do a budget?” 

The answer to this is, what most businesses should know is their expected expenditure. 

A Simple Budget

1. You start by entering your fixed costs into a spreadsheet with a column for each month of the financial year, plus a total for the whole year. 
   Fixed costs are those that you incur whether you sell anything or not e.g. rent, wages etc.
   
2. List all of your fixed cost items by line, and using the previous year and your expectations for the coming year, enter a monthly figure for each expense item.
   
3. Enter a total formula for each month and the full year of expenses.
   You now know what your break-even point is for each month and the year.  Break-even is the amount you need to sell to create neither a profit or loss but a $0 result.
   
4. Now you can enter an estimate of income for each month.
   If there are variable costs such as product purchases or labour, if it’s a service business, enter them just below the income. 
   Variable costs are those that are incurred only when a sale is made.
   
5. Enter a formula deducting the variable costs from the income to give a gross profit figure.
   

6. Now add a final formula at the bottom deducting the fixed costs from the gross profit to get your expected net profit figure.

Now you've got a Plan!

Once you have done this you have something to aim for and work with. 

As the saying goes,

"if you aim at nothing, you'll hit your target with amazing accuracey every time".

Each month you can replace the budgeted figures with actuals to create a ‘Rolling Budget’ which will tell you what your yearly results will be if you meet budget in the remaining months of the year.  This can be a very enlightening exercise and show where you need to focus attention on both income and expenditure.

Note: this can be the basis of a cashflow forecast by removing any non cash items such as depreciation and entering an opening and closing bank balance for each month. You would also need to enter any items not in the Profit & Loss report, such as GST and Capital Expenditure.

By doing this you will see the monthly future bank balance and where any extra funding may be required.

When/Why Should Businesses Review their Budgets?

Budgets should be reviewed monthly.  This can be done by entering your budget into accounting software and printing an Actual; versus Budget Profit & Loss Report at the end of each month.

A budget is a guide to financial performance of the business and a way to quickly identify overspending and potentially loss making situations.  The sooner this is done the less money is lost or wasted.

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