As promised last week, this week we discuss Financial Planning, which has another name that we are all more familiar with, a BUDGET. A budget can be any size, for any purpose, from the Finance Minister’s budget for the country to the budget for your daughter’s birthday party. Any business, no matter what size should have a functional budget.

A budget is a way of ensuring that a limited amount of money is used in an effective way. It helps to ensure that expenditure doesn’t get out of control. We all have nightmare stories of the business project that ran over budget and out of control. Can you imagine how bad it would have been if there was no budget and the consultant or staff didn’t have any target to stay within!

A budget also assists you in knowing how much money you need to find, earn or borrow, to achieve your goal in your business. Once you have the funds, it helps you to stay within your available resources.

Your business budget should the following:

– A specific timeframe – there is a start and end date for a budget, either an event, a year, a month, a project.

– Be forward focused – a budget never deals with the past, only the future

– Detail income as well as costs – you need to know where the money is coming from to pay for the costs, this can be as detailed as necessary.

When preparing your budget for next year here are a few things to consider:

– What activities will be involved?

– What resources will be needed to perform these activities?

– What will these resources cost?

– Who will complete the activities – staff, out-sourced personnel, volunteers?

– Where will the activities occurrent for your premises, or hire a venue, or outdoors?

– What are your existing commitments – contracts and non-negotiables?

– How do these anticipated costs compare to the actual payments in the past for the same things?

Remember that your budget will be based on assumptions as the future is uncertain. Make sure you document these assumptions in case circumstances in your business change and the budget can be updated.

Next week, we’ll look at recordkeeping, a vital process for any successful business that helps track spending against your budget.

This month’s topic is financial management. Now, don’t think to yourself, my accountant does that, and move on to the next cute video of puppies. Understanding the basics of financial management is the responsibility of the business owner as much as the finance team. Without a clear idea of what financial management involves, you are setting yourself up to be the victim of fraud, mismanagement, unnecessary tax and a whole host of SARS problems. So as they say, it is better to learn a little up front, than have to do a crash course in the midst of a crisis.

So what exactly are we talking about? Financial management involves planning, controlling and monitoring the financial resources of a company in order to achieve its objectives. Although the accountants just do it for fun, we shouldn’t only be keeping track of the cash to make it to month end, there should be some objectives in place:

– Do you want to be profitable by year 3

– Do you want to break even this month

– Do you want to save for that big capital item

– Do you want to open a new branch or launch a new product

What are you working towards as a company and what are the financial implications of that goal?

There are 4 main elements or foundation blocks to financial management:

· Planning – identifying what needs to be monitored, what amount you need and how you’re going to raise it

· Recordkeeping – keeping track of what comes in and what goes out in a logical, helpful format

· Reporting – monitoring how reality matches the plan, and deciding what needs to change

· Procedures and control – making sure nothing is missed and everything is checked

Over the next few weeks, we will discuss each one of these in detail. Don’t worry, you won’t need your accountant to interpret, we’ll use English to explain.

We start a new series this week with a look at some financial management issues that every business owner should be looking at on a regular cycle, well at least twice a year. Performance Management? What is it? How do we define it and even if we get the numbers, what do we do with them? Let’s start by unpacking some of the mysteries and terms related to Performance management in your business.

The bottom line…The amount of profit a business has made is a universally accepted standard for keeping score the world over. We always measure how successful a business is by the amount of profit it has made. Banks will offer more credit to more profitable entities. It does make sense because the net profit represents the true income of the business, and consequently of the owners.

The increase in sales, gross and net profit are some of the basic Financial Performance Indicators (FPIs) that any business person would keep an eye on to ensure that the business is viable. The downside, however, is that the managers or owners get caught in the rut of profit chasing at the expense of the very reason the business was set up the in the first place.

Financial Performance Indicators are vulnerable to manipulation. Managers become obsessed with reducing costs even at the expense of the organization’s long-term viability. This is because recognition, bonuses and even promotion are linked to how profitable a manager is. These cost-cutting measures may impact negatively on staff morale, quality of products or services etc. Focusing on the bottom line disregards what actually drives the profitability of the business.

Is there a solution to this myopia? Is there a way to balance the objectives of the business to ensure longevity? We explore this in the next post.