Businesspeople rarely need a reminder of the importance of managing a budget, but how flexible should it be? Should you stick rigidly to what you’ve outlined at the start of the year, or should you see your budget as a piece of modelling clay that you can mould, add to, or take parts away from as the year progresses and the direction and achievements of your business take shape?
To allow for more malleability in your budget, one suggestion to consider is working with three budgets in mind. Let’s look at this idea in more detail:
The break-even budget
Even the best businesses have bad weeks, months and even years. It could be that a major supplier has pulled out, or simply that there is a dip in the market for your product or service, which may require a re-evaluation on your part. It’s for this reason that businesses ought to set out a budget to limit the damage should the worst happen.
Review your accounts and put a budget in place that will cover the bare minimum cost of your business’ operations. In the early stages of the year, it’s wise to stay close to this figure, although regular monitoring of your books will let you know if any manoeuvrability is possible.
The stretch budget
On the opposite end of the spectrum, sticking steadfastly to a limited budget is unambitious if your business is exceeding expectations. Though doing so would see you end the tax year in a healthy profit, it is often better to ‘ride the wave’ of a good business year, building upon your success by adding new staff and services while you’re enjoying a good spell.
Set your firm an ambitious but achievable budget to allow for this, with the aim of ensuring that it’s more than just a purple patch.
The likely budget
This is what most firms go on – a forecast budget based on the previous year’s takings and outgoings. Indeed, it’s crucial to have this in mind and it should be the main one on which decisions are made, but the break-even and stretch budgets will give you the breathing space or freedom to push forward that you may need as the year progresses.
Of course, the key to ensuring that you are working to the most suitable budget is to regularly review accounts and be sure that you are always in the know on how your business is performing. This is one of many reasons why so many companies prefer to use financial outsourcing and allow a professional accountancy team to spot peaks and troughs on their behalf.