Fundamentals of a business budget

A business budget is one of the essential tools in managing your business finances and actively building your business.

A budget shows what you plan to do with your cash over the next year.

For a complete picture of your business health, you need to review the profit and loss statement, the balance sheet, the cash flow forecast and the budget. Taken together, these reports allow you to make informed business decisions and monitor performance.

Why have a Budget?

  • Forecast sales and expenses according to monthly or quarterly variations.
  • Evaluate performance over time, including changes or patterns.
  • Get really familiar with where your money goes and where it comes from.
  • Clarify targets and goals and use the budget to help you focus and achieve those goals.
  • Comparing actual figures to budgeted figures allows you to see potential problems early and plan for unexpected costs.
  • A budget will help you to see the big picture and stay motivated over the long term.

Where to start

A basic budget takes known income and expenses, then makes certain assumptions about the timing of income and planned expenditure. The basic budget is based on cash in and out of the business.

Over time, as you start to see the benefits of using a budget, your budget should evolve into a more sophisticated version that includes non-cash elements such as provisions and depreciation.

Most businesses will start with one budget but soon move to having three budgets.

  1. Business as usual – the next year’s budget is based on current year income and expenses, with perhaps a small adjustment for consumer price index increases.
  2. Worst case – budget is based on a pessimistic view of next year’s performance.
  3. Best case – budget is based on an optimistic view of performance over the next year.

A budget is usually for a financial year, but you can also set up budgets for two to five years.

Once you have one budget (or more) set up, you can then run your current financial reports against the budget to see how you are tracking. This allows you to make rational business decisions in real time to adjust accordingly.

Your can run your financial reports monthly and adjust your budget as needed.

What Next?

Now is a great time to put a budget into place for the coming financial year. Book a time with us to help you create a meaningful budget in your accounting software so that you can use it as a proactive part of your business management, strategy and your success.

Maintaining Customer Relationships

With many businesses struggling to achieve pre-Covid sales levels, and the potential for unemployment to spawn a new breed of start-ups, having a customer retention plan has never been more important.

Surprisingly, the most inexpensive way to grow a business is to maximise customer retention. Statistically, the probability of selling to an existing customer is 60 – 70% and drops to just 5-20% for a new prospect. Existing customers are also 50% more likely to try new products and spend 31% more when compared to new customers.

10 Retention Strategies to boost sales with existing customers:

1. Listen to bad reviews and complaints.
These are a blessing in disguise so encourage all feedback, including complaints. Consider running the Net Promotor Score customer survey or asking your customers the all-important question ‘What’s the one thing we should do to improve our service to you?’ Then, act on that.
2. Go old-school. Call your customers.
Calling your key customers every few months shows you care and gives them individual attention. Simply ask how they are, talk about any new products or special offers, and let them know that you care. Your call process and frequency will depend on your industry.
3. Go the extra mile. It’s never crowded.
If you’re a service business, schedule an after-service phone call in your diary to obtain feedback; asking if the service has met their expectations. This is easy to do, but few businesses do it, so bake it into your sales process. Quality trumps speed!
4. Create a VIP programme.
Reward your most loyal customers, knowing that it costs five times as much to attract a new customer than keep an existing one. Consider members-only events, discounts and VIP cards. This applies to almost any industry.
5. Be social.
Get creative on your social channels. Follow key customers and be part of their online community. It may be worth setting up a closed Facebook community group to foster community spirit and leverage your customers to help build your brand. For example, a vegan restaurant owner could create a closed Facebook community where customers share community events, recipes, ideas, menu suggestions, etc.
6. Have a referral system.
There are three simple steps to a successful referral system. Firstly, ask for referrals (make this clear on your website and in all other communications). Secondly, when you get a referral, thank the referrer. Lastly, reward them, either by giving them ‘soft dollars’ (a voucher to spend in your business) or an appropriate gift.
7. Hold events (social distancing permitting).
Consider hosting invitational instore events or organising a group to attend a sports game or movie premiere; just some ways to thank customers and reward their loyalty. Take the communication offline to encourage social interaction between close customers and your team.
8. Send a thank you card.
When you get a new customer, send them a handwritten card. Set a high standard of customer care by making that first impression. Snail mail is rare these days, so make it count!
9. Use the FGG principle.
Find out what they want, Go and get it, then Give it to them! Every chance you get, ask customers what they need, what you could be doing better to serve them, and then act on that. Help them to help you grow your business.
10. Create lifetime customers.
This strategy should be your number one priority. Start with your purpose (why you exist for your customers). Summarise it in one sharp sentence. Make sure your team understands your purpose and how behaving true to that purpose will help create customers for life.

Creating your Customer Retention Plan

You’ve probably got lots of ideas for improving customer retention. You won’t be able to implement them all, so choose some strategies that will be easy and inexpensive to implement but will have a big impact. You’ll need to record your chosen strategies and actions in a Customer Retention Plan and train your team on how they all play their part.

“Satisfaction is a rating. Loyalty is a brand.” – Shep Hyken

Reduce Debtor Days and Increase Cashflow

Managing the gap between the receiving money into your business and paying money out of your business is vital for sustaining viability.

Debtor days is the average number of days taken for a business to receive payment for goods or services. Keeping track of the average number of days for a business to receive payment is important in understanding the cashflow gap you might experience and the impact on cashflow planning and budgets.

How to Calculate Debtor Days

(Year-end receivables amount ÷ annual sales) x 365 days = average debtor days.

Here’s an example: An IT consultant has in her terms and conditions that payment is due 21 days after invoice date. But she is interested to know what the actual average payment time is.

Trade debtors at 30 June 2019 = £35,000

Annual sales for 2019 = £478,000

(35,000 ÷ 478,000) x 365 = 26.7 days

With this information, she can either alter her cashflow planning according to the actual time-frame or take steps to reduce the average number of debtor days.

What can you do to reduce the payment times?

  1. Update your payment terms – and make sure the terms are clear on every invoice issued. Don’t forget to include bank details on the invoice!
  2. Regular admin – schedule a regular time for your own administration and get your invoices out promptly.
  3. Send to the right person – when you send invoices, make sure you address the email personally to your contact. Send the invoice to multiple addresses if possible, for example, your contact and the accounts department.
  4. Use technology to your advantage – use automated invoice reminders to notify customers when an invoice is about to be due and then when it is overdue. Do not wait to send notifications manually, let the software do it as soon as the invoice is a day overdue.
  5. Make it easy for your customers – list the payment terms, for example, due in 14 days, as well as the actual due date.
  6. Provide incentives for early payment – for example, a 5% discount if paid within five days.
  7. Offer several payment methods for clients – make it easy to pay by adding an online option such as credit card or PayPal.
  8. Offer instalment payment plans – over a mutually agreed period. This allows you to plan for part payments, rather than being inconvenienced by the whole invoice being paid late.
  9. Do not offer unlimited credit to customers – make sure your terms and conditions include the right to refuse further supply if invoices are outstanding. Request part or full payment before supplying more goods or services.
  10. Talk to your suppliers – Maintain good relationships and clear communications so they are more likely to help you if you need an extension on your bills. If possible, renegotiate supplier terms that suit your business cashflow.

During tough times it can be difficult to get paid on time. Use low activity phases in your business to update your terms and conditions, implement alternative payment options, think about ways of making it easy for customers to pay you and clarify information on your website.

Talk to us about adding payment options, updating your software and improving business systems to assist in reducing the number of debtor days to improve your cashflow. We can also look at average debtor days of your business compared to industry averages and discuss ways of managing cashflow during difficult periods.