Budgeting: the art of planning for a profit

Press, 6 July 1983, Page 29

Budgeting: the art of planning for a profit

Everyone is in business to make a profit: a surplus over and above running costs, sufficient to reward the owner for the time, energy and money put into the business. A budget is the plan of how the business is going to achieve this target for the next 12 months.

Many small businesses do not have a formal budgeting process. Ask six business owners why and six reasons will be given. No-one wants to embroil business owners in an exercise that they can see no benefit from. However, research into smallbusiness failure indicates that lack of planning (and a budget is a plan) is one of the prime causes of failure. In today’s trading conditions who can afford to ignore such warnings?

The owner can prepare a basic budget based on three figures: the costs of operating the business, the reward the owner seeks for himself or herself, and the resulting minimum sales level that must be achieved.

While this may not be the textbook approach, it will give an adequate tool to plan and monitor the business this year. The owner should start by calculating the costs of, running the business, the overheads, and staff wages. It is probably easiest to base the estimates on last year’s figures as shown in the financial ac-

counts the owner should have recently received. The owner should look at each cost and consider what it is likely to be this year. If any major changes have been made to the business (such as another vehicle bought, or a new shop opened), then these could affect overheads significantly. The owner should not ignore the effect of the price freeze; once any of the restraints are eased some costs may increase

dramatically. The reward required for the owner’s efforts should also be considered. The powder-blue Rolls-Royce may have to wait, but the value of the efforts should not be underestimated. If a reasonable salary is not planned for, then the chances of achieving this are slight. Adding overhead costs and profits together gives the minimum gross profit needed for this year. This should be converted to a sales figure, based on the usual mark-up. This is the minimum sales that must be achieved to cover all the costs and earn an adequate reward for the owner — often known as a breakeven sales level. (Small Business Agency Guide No. 1 describes in more detail, the calculation of a breakeven sales level). How does this sales level compare with last year? If it is significantly higher, then the owner needs to look very seriously at the chances of achieving this. It may be very difficult in today’s trading climate. The costs should be reviewed — can some of these be reduced or eliminated, thereby reducing the sales target? It may be decided to set the sales target higher than break-even, once it has been compared with last year’s

results. Any sales above break-even level will give a significant increase in the profits for the year.

Once the owner has decided what sales need to be, the spread through the year must be considered. Sales may come evenly throughout the year or there may be seasonal peaks. Last year's results will be a guide.

The retailer should write down now the plan to achieve these sales: midwinter week specials, Easter promotion, or whatever. The estimates should go in a diary so that there can be planning well in advance. The owner needs to consider what capital expenditure he or she will have during the year. Does the business need a new vehicle, or some replacement shop fittings? The owner should consider the best time of year to do this: ideally when there is spare cash (the cash-flow plan can help here). Is there a good time of the year to pick up bargains? The owner should note in a diary what has been decided.

Preparing a budget isn’t difficult; all it needs is some thinking about the business and how it is run. And advisers of the Small Business Agency are happy to help.

July The following courses are being run by the department of business studies at Christchurch Polytechnic: Financial management: July 11, 18, 25. Investment seminar: July 11, 13, 15. Storekeeping/warehousing, stage 2: July 26. Running a small business: July 19, 21. Seminar on productivity improvement — labour control: July 16.