Let’s face it.  Most tradies would rather be forced to watch replays of marathon chess matches than put time into creating a budget for their business.  I can understand their reluctance, but I would also like to show them the error of their thinking.

Creating a budget for your business can be one of the most empowering things you can do for yourself as a business owner. 

Big claim!  How so?  Some of the reasons and benefits for spending some time creating a budget for your business and then reviewing it regularly, in my opinion, include:

Set monthly goals and measure progress.

A budget by definition is forward looking.  If you are only using a Profit & Loss  (what your accountant may call a Statement of Financial Performance) you are effectively driving your business by looking in the rear vision mirror.  A budget forces you to cast your vision forward and if you then break it up into a monthly format, you can regularly review your progress and then make small adjustments to strategies as you go to keep you on track

Find out your break-even

Do you know how much it costs to run your business?  Many tradies I have asked this question to can’t answer it, and it is VITAL you know this figure. These are the overheads that don’t vary much regardless of the level of trading undertaken.  Once you know this figure, do you then know how much revenue is required to cover these costs?  This is your break-even level of business and is an important figure to know.  Below this level you need to make some serious decisions about what you are doing.  A budget will help find this out.

Test assumptions

A budget allows you to “test” different scenarios in your business before you take the plunge.  Without one you may have to wait for 12 months, when your accountant sends you next year’s annual accounts, to see if your ideas have worked or not.  By then it is too late to make changes.  I usually have clients prepare at least 2 budgets; a pessimistic one and an optimistic one.  Doing this you can then play with figures when making plans and see what financial implications they have, before committing down a path of action.

Forecast future Cash Flow

By converting a trading budget into a cash flow forecast, potential funding problems can be uncovered and a proactive plan put in place to find ways to fund this shortfall.  This compares with stumbling into a cash hole, panicking and having to rush to the bank and go down on bended knee to the lending manager.  Better to go to the bank ahead of time with your professional looking cash flow forecast in hand and negotiate from a position of knowledge (and thus power).

The Biggest Benefit

All of the above are good enough reasons on their own to get into budgeting, but I think the biggest benefit of all is the feeling of empowerment that the process will give you.  In my opinion it is not the budget document that is the most valuable benefit; it is the PROCESS you follow.  It is the time you spend chewing the end of your pencil thinking about some what-if scenarios and testing what they mean from a financial point of view.  If nothing else, this will be sufficient reward to you for taking some time in mapping out the future of your business in dollar-profit terms.

It’s about the journey, not the destination.

In future posts I will start to map out the process to follow in putting a basic trading budget and cash flow forecast together.  Stay tuned, or even better contact me at andy@tradescoach.co.nz and I will help you with your particular needs.

Andy Burrows

The Trades Coach