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35 min read

Episode 19: Does Your Business Need a Budget?

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In this episode of The SME Growth Podcast, Dave Parry and Richard Buckle discuss budgeting for business and whether or not every business even needs a budget. Learn more about the pitfalls of budgeting, what to consider to get the most out of your budget and ways to make a budget work best for your SME.

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Please note: Whilst all transcripts are double checked for accuracy, they are transcribed via Otter.AI so may contain errors.

David Parry 02:07

Hello, and welcome to The SME Growth Podcast from Wellmeadow. I'm Dave Parry. And with me as ever is Richard Buckle. Afternoon, Rich

Richard Buckle 02:19

Afternoon.

David Parry 02:21

So we're getting together again, this is dropping on St. Patrick's Day, actually. So turns out, we were just talking about Guinness, it's all very appropriate that we're not gonna make you do the whole thing in a blinding accent or anything like that. What we're going to talk about today is sort of relevant, because this week, it's Budget Week in the UK. And so it's hearing Jeremy Hunt, telling us what all the taxes and allowances are going to be doing. So we're not going to talk about that, because there's plenty of other people doing all of the analysis, the budget, but it did make us think about budgets generally, you know, what's the point? What is the point of a budget? Should you do a budget? Is there any any reason why you wouldn't do a budget? And let's be honest, we know a lot of people that don't do budgets?

Richard Buckle 03:05

Indeed, because it is a bit of hard work, isn't it? It takes a bit of effort. You know, everybody's busy. If you don't need it, if you don't really need it, would you bother? 

David Parry 03:16

You don't use it. It's just something to keep finance busy once a year, put budget together. But why bother? And if you haven't got a finance department and you got to do it yourself? Again, why bother? So we thought we'd maybe explore some of those subject find out if we can give you an excuse not to do it. Because some few people listening thinking, Oh, this sounds good. I'm gonna

Richard Buckle 03:34

say Yeah, you can you could either put your budget together or drink some Guinness Zero.

David Parry 03:40

Spend your budget on on Guinness. 

Richard Buckle 03:43

So well, what is a budget? Before we define it

David Parry 03:46

as well? Yeah, you're right, because a budget gets sort of confused with a few other terms, business plan or forecast and those sort of things. So it's probably worth just pulling that apart a little bit. All of those things have something in common in that they are a forward looking view of the finances in some way, shape, or form, probably at least a sales element. What we're going to sell with the income bit, yeah, probably a profit and loss. So have given those sales, are we going to make you know, or are we going to make any profit? And if you're really advanced, you'd be forecasting or budgeting or whatever the balance sheet again. And so that's what they've all got in common. A budget, though, I would say is probably a bit shorter. Well, shorter, middle term a year. Yeah. If those three things we just talked about, would you say? That's probably fair?

Richard Buckle 04:36

Yeah, I think so. I think otherwise, it's getting into too much of a, well you're starting to stray more into business planning.

David Parry 04:42

Yeah. Which is as long as there's a longer term view that probably be three years maybe sometimes five, but at least three.

Richard Buckle 04:49

Maybe linked to some larger investment capex spending that type of thing. 

David Parry 04:53

Yeah, certainly that's got a different, we'll cover that uses of a business plan. That's a different thing for a different audience. But a business plan would also have other things in it probably more words in it. In fact, maybe the budget as we're talking about is kind of one a bit of the appendix,

Richard Buckle 05:09

the appendix, the financial section now maybe everybody goes through for year one, what's happening next year?

David Parry 05:15

So if that's the difference between a budget and a business plan, sort of one year versus three year and maybe some different uses, whereas the forecast sit that shorter term thing?

Richard Buckle 05:28

Yeah, I mean, I guess what they say about forecast, is that the one thing you can be certain of, it's going to be wrong, which I suppose you could apply to a budget as well if you wanted to, but But yeah, I think I mean, I suppose if a budget, I'm trying to think of an analogy here. I go back to the old bowling ball analogy.

David Parry 05:46

Oh, you like a bowling ball analogy.

Richard Buckle 05:47

I like a bowling ball analogy, works quite well, with the bumpers. The budget would almost be I'm thinking on the fly here. The budget would almost be like, okay, hitting the pins at the end of how we hit what we're supposed to be hitting. And the guards are there. The forecast would almost be like, Well, are we going to hit the buffers? On the way down? Like, how many times are we going to hit the buffers on the way to hitting the pins? Maybe?

David Parry 06:08

Yeah, no. Okay, for thinking on the fly I'll buy that. Yeah, it's definitely a shorter term view. And certainly the board meetings that we've both been in where we change the forecast every month. New informations arrive, the order book is different, we've invoiced some stuff, we've won some new orders, we've lost some, maybe we've taken on new people that we didn't expect. So the next three months view can be constantly moving. But if you rebudgeted every month... 

Richard Buckle 06:33

I think it's maybe more event driven. I'm just thinking of a situation, over the last couple of months I've been in with a firm that the budget is set for the year, based around a number of assumptions, the forecast and by that it's mostly cashflow forecasting, which is I suppose, largely driven by the sales forecasting, but because of the situation, it actually had to get into maybe a lot more detail than so we might be forecasting monthly to start with. Whereas the budget might be for the whole year, but we're looking at a monthly forecast or at least a month out. Depending on certain events that drive it. It was right Okay, now we've got to go to like a weekly forecast, or maybe even a daily forecast. So you wouldn't go to you wouldn't go to a daily budget, because you'd be like, well, what's the point? Daily forecast can be useful if things are getting tight. And you need to be able to say, Well, okay, can we stretch creditors? Or can we move this around? Or there's more funding? So it's, I think a forecast can be a lot more agile, maybe?

David Parry 06:33

I think it has to be, probably for more stronger purpose? Is that the right word? More pressing needs? 

Richard Buckle 07:48

It's for managing something, isn't it really, really, if you've got to manage a situation

David Parry 07:51

You've spoke about cash flow forecasting, there are lots of businesses don't do cash flow forecasting. Now, that's perfectly okay. I suppose if you've got either plenty of cash, or very profitable business, so that you know that you're going to be growing out of whatever position you're in, the people who do cash flow forecasting, almost down to that daily version, let alone weekly, or those that are up against the buffers. And if they get that wrong, and end up paying a supplier too soon or making a decision that costs money, you could go bust. So you have to have a very tight handle on like cash, but that's definitely a forecasting thing. And even going back to Profit and Loss forecasting, looking to three months out that's useful for saying, well hang on a minute, we're going to be entering a lean period. Let's hold back on that recruitment or that investment, or conversely, we got a bumper time coming up soon. We're gonna need more people. Sales forecast has just gone up by 50%, operations aren't geared up to do it yet. So Operations Director get some more people in. So that's the short term reacting, but you wouldn't do a re budget then? No, but I think there are still reasons for doing every budget mid year.

Richard Buckle 08:53

I think it's something fundamentally shifted in the business, then it would almost be well, it would be a bit Cavalier just to carry on as if, you know, if your fundamental like, I think with your budget, it's got to be underpinned by assumptions and I guess we'll talk about that in a bit. If those but if those assumptions fundamentally change there's no point carrying on as if they haven't.

David Parry 09:14

You know, what though you see that you see where the budget is completely blown to pieces one way or another, you know, something like you said, assumption is just changed a major, major thing has happened. So clearly, the budget isn't worth the paper. It's written on anymore. There's no way it's going to be delivered or month to month basis, let alone year to date, and yet businesses carry on reporting their accounts Compared to Budget. This is for the birds. Surely then mid year. You say go on then, let's rebudget. 

Richard Buckle 09:43

We had one added situation yesterday, I was looking at some accounts and the actual year to date and bear in mind we're in period nine or something so reasonable chunk through the year. The actual on the sales, the variance to budget was 1%. I thought that's not that's not too bad, actually. But when you actually break down, what was going on, the actual kind of sort of sales line was pretty bang on that wasn't too bad. The the change in the whip on the budget because they, you know, budgets, whips in the budget was something like, minus 150%, or something. And the change in the interest that had been earned on investments and things was up by about 3000. Now, the overall impact of that netted each other off. And so if you actually looked at it, you'd say, well, that's pretty well forecast 

 David Parry 10:37

So they were just lucky then? 

Richard Buckle 10:39

I said that this is more luck than judgement, like, but, but again, I suppose it's looking at those assumptions would assume certain things. You know, clearly interest rates have gone up in the year that no one was forecasting, you know, moving back a year ago, or probably, yeah, 12 months ago, when the budgets were being put together. Would you have expected interest rates to go that high?

David Parry 10:49

There's some pretty generous accounts around at the moment, if you put money on deposit, aren't they? So there is a reason reason when re budgeting may happen mid year, but on the whole, you'd like to think a budget will last a year, forecasts gets updated monthly, but at the highest level, and a business plan is a bigger thing that maybe last three years or five years. So just a thought, then what do you use a business plan for differently from a budget? Because we said one is kind of a subset of the other anyway

Richard Buckle 11:32

I think you could, I mean, obviously, you could slice this different ways. But I think maybe a business plan is probably a little bit more externally focused, maybe trying to get investors, you've got external shareholders, you're trying to, you know, show the bank that actually we've got a team here that can deliver on these numbers. 

David Parry 11:50

You'd certainly have it for a startup. But you're right, sometimes you do it midstream. And it's an established business, we've done a couple in our time, a full on sort of three to five year business plans with bios of the key members of staff and a competitor analysis and all those things that go into business plan. But you wouldn't do that every year, normally, for a stable ongoing business would you

Richard Buckle 12:10

No, I mean, I guess you might, you may tweak a little bit. But I guess the point of having the three to five year plan is that it's a three to five year plan that you sort of stick to 

David Parry 12:19

Gives you that longer term, something to aim for. But if you're applying for grant, they will definitely expect a three year business plan with all the financial forecast.

Richard Buckle 12:27

You will definitely see it with the banks, done a number of those where they the banks really want to see that there is a plan behind the numbers. And so it's maybe not a full blown business plan. But it's definitely kind of there's a there's some objectives here. And there's a timing plan, and we're going to do some activity that's going to change what these numbers look like the that's kind of

David Parry 12:52

An apocryphal suggestion here, just to sort of line it up a bit. But do you think when a bank gets a business plan for a business, they scan it in, put it in the folder marked company XYZ business plan, and move on? Or do you think they go through it with a fine tooth comb and ask detailed questions?

Richard Buckle 13:12

Well, I think, in my experience, the bank only really tend to ask for these things if they're either looking for investment, you're looking for investment off them, so they want more money. And ironically, they only really tend to give money to people that don't really need it. But, but they also really want these, the business plan when you're looking at business support situations, which from time to time, number of companies get themselves closer scrutiny, and they want to know that they're not just going to keep it. So oftentimes, you might be looking for an overdraft extension or some more funding or some and they want to know that you're going to get the business back on track. And I think, in my experience, they very much do look at those plans. 

David Parry 14:02

Yeah, interesting then so they do in in those circumstances where, where the chips are down, maybe different people get involved from the bank

Richard Buckle 14:09

They do

David Parry 14:10

As opposed to your normal, you know,

Richard Buckle 14:12

It's not your relationship directors normally still involved. But you've got special business support people that come along

David Parry 14:18

Same with the credit committees, I suppose if you're asking for a reasonable amount of extra input of debt, then the credit committee will no doubt go over it in more detail. You just don't necessarily see that as the customer, the bank's customer. It's all happening behind the scenes and your relationship director just comes back saying yeah, thanks for that they've ticked it off or

Richard Buckle 14:34

I would say any business support situation with a bank, they're going to be looking at, they definitely look at the plan. And they keep pretty, not close tabs on it, but they're very interested to see, you know, have you hit these key milestones, the budget, you know, have you reduced the headcount or have you got that new kind of division up and running. So that's going to generate the sales or moved on.

David Parry 14:54

It's not just the numbers in that case is it's the actions that are implied by. Okay, so let's think then when we've done the contrast between the budget and the business plan, let's think more about the budget. And ask ourselves, what's that really used for? Because if we're trying to help people come to a view here is are they right not to be doing one? Or are they wrong to be doing one? I don't know, what's the main uses. So I tend to think of this a bit in time terms. So when you're preparing one, you get some uses out of that, maybe then when you're running through the period that you've done the budget for that's of use, and then just having one at all, and maybe looking back on how well you did, that's kind of a different sort of thing. So I'm trying to think in that first bit where you're writing one that almost makes you ask a lot of questions, doesn't it?

Richard Buckle 15:40

Yeah. So you're going to look at why suppose you want to think about who needs to be involved? You're going to start thinking about who are the decision makers here? Who do you need around you to collect information? That's obviously going to depend on the size of your organisation, isn't it? It might be that you've got departments. So you've got department heads that need to get involved. And if it's, if it's, you're not such a big company, it might just be that you've got to make the time to sit down and think about it, 

David Parry 16:07

Got to do it yourself. Yeah. But it does force you to think with each of those functional heads or whatever they are, what are our priorities? And if we've got a certain amount of income, and some existing costs that we could either reduce or increase, where are we reflecting our priorities in those decisions, which is very similar, if you'd like to the government budget that we said, triggered the thought this week that all they're really doing is signalling, certain areas are more important or less important, they've got a bit more into defence, because of the situation in Ukraine, they're going to tweak the tax arrangements around pensions, because they think that will encourage more 50 somethings to not retire early, they're going to tweak the Child Benefit arrangements and childcare arrangements. It's all just about trying to nudge behaviour a bit. And maybe it's the same in a company to some extent, if we say, our research and development budget goes up by 50%, that's signalling that we're taking that seriously. We're cutting it back. And not spending as much on marketing or spending more on marketing all these things. Questions, you have to ask yourself and come up with answers for because the numbers that come out of it will dictate what actually happens.

Richard Buckle 17:13

And that's where maybe having a process around the the putting the budget together could be useful. Because you you're going to a want to A) ask all those questions. B) Where do you get your data from? What data are you reviewing? To say, Well, okay, well, last year's budget, was this, this year's budget, do we I mean, a lot of people just sort of like, Okay, what did we do last year, let's just roll that over, finger in the air 3%, or whatever put that on. But to give it a sort of marketing spin, as it were, like, you know, do you look at your, your, where are your customers coming from? Have you seen that grow in? Certainly, what's your product mix looking like? It does that change over the year

David Parry 17:53

Well, there's a, there's a strategic element to that, then as well, isn't it rather than just saying our sales are gonna go up by you know, 3% 5% 10%, whatever is bringing it down to the next level down different by region, maybe by product, or by type of sale channel, all of those things could prompt very interesting discussions that well, this area is underperforming, let's either kill it off or invest more, to bring it up to up to scratch. So it does force you to have some more strategic discussions once you

Richard Buckle 18:19

I think that's, that's, that's more important, if you've got maybe different departments or different divisions in a business that have different cost structures, different margins, you know, just you don't want to just have a single line sales number. I mean, you've got examples before where, you know, they're very, very, almost different businesses all under one umbrella with very different kind of, you know, sales and sold margins

David Parry 18:48

Capital requirements, all of that needs. Yeah. So it's good to have all that flushed out. And then if you think the other point, when you were still in the preparation phase of a budget, then you're referring that to your five year goals, you mentioned those at the top, that helps you think, are we actually getting one year closer to our five year goal, if we run the year like this? And it may be that you've got some elements of your your five year goal, your strategy, which could be quite explicitly financial. If you've got a lot of debt, for example, one of your goals might be to get debt free. Or it might be to make an acquisition, which case we've got to build a war chest. Yeah. Or it might be to get better buying power with suppliers by paying them quicker. Yeah. So they could be very explicit, financially related things that you're trying to achieve. Don't you've got to build into your budget, or is that just wouldn't happen?

Richard Buckle 19:35

Yeah, absolutely. I think as well. And just one final point on that. Another point on it is to say, if you're involving other people, they can take ownership of their budgets. And yeah, so do you want a boat budget forced on you? In some cases, that's going to happen just because the way it is? Or are you delegating that and letting people take ownership of as part of a process maybe

David Parry 19:56

Let's come back to that, because it is really important that how you put a bug together, and whether you hand it down on tablets of stone, or whether it's some sort of version of a collaborative experience, that's that's important. Hold that thought. So we've done the preparation. Let's imagine now we're in flight, as they say. So we're in the period where we budgeted in the year, let's say we budgeted for, and things are happening. And we're starting to report on results. We've got the actual results coming through. The first use of that budget is to get accounts to present your monthly results alongside the budget for that month and just see what was the difference? Yeah, we had a budget, we're behind budget year to date, we had a budget we behind budget.

Richard Buckle 20:34

Well, interesting thing here that we've bought, I suppose we've seen is that accounts, or the finance people in the room know exactly where to go when they're comparing those numbers, don't they? And everyone else, I guess, if you're looking at spreadsheets all day, it's normally a spreadsheet, isn't it, these numbers get printed on, somewhere like that. When you know where to look, it's easy to see whether something's the variances out or whatever it is. And we found over the years that a lot of other people in the room who are maybe responsible for the budget for that particular area, or they get presented with a set of numbers, and not everybody is a numbers person are they achieved paper, a sheet of paper covering numbers with some of them red some of them in brackets, or you know, what does this mean? So maybe it's worth just touching on briefly how to present those numbers so that people actually own that process.

David Parry 21:29

We developed this approach in a number of the board meetings, and you're right to call out the fact that the finance people never saw the need to change it, because they're quite comfortable with it. But as soon as we presented a more graphical version of things, especially showing commutative year to date numbers as it's evolved through the year, rather than just a snapshot of where are we here today? Yeah, and showing each of the months one by one, comparing it to the budget monthly, and maybe even comparing it to last year, it's useful. All of this stuff went on a piece of paper with numbers looks really messy. But we came up with this version that we refined over the years. And I would say almost without exception for the non financial people in the room. They said, Ah, I see. That's yeah, that's what's been happening. Oh, my goodness.

Richard Buckle 22:13

So it was like, like a graphical P&L, wasn't it? So what do we call it?

David Parry 22:17

Accounts viewer? Or the graphical P&L

Richard Buckle 22:20

Great name.

David Parry 22:21

How did we come up with that?

Richard Buckle 22:22

I think importantly, I mean, it really it did tell the story, didn't it? So we tried to take it all the way through from inquiry to kind of cash received

David Parry 22:29

Oh that version! So the whole business cycle, so people might think of it start with as starting with sales. Yeah, for cost of sales gets a gross profit, take off your overheads get to net profit as your p&l, but be right up front of that, before you get to sales. You've got some lead indicators. Yeah, so many inquiries have we had and maybe even a value of those, how many quotes that were produced, what value of them and more orders are we received? All of that could be months, or sometimes years ahead of it hitting an invoice line. So really powerful lead indicator stuff. And then after the profit bit at the bottom, the net profit, you've got some balance sheet stuff. So what's happened with our debtors? You can only have that as if you've invoiced so yeah, well, they're going up or down or the debtor days changing creditors. Are we paying our suppliers on time? Was the stock levels doing? Yeah, and the result are that the cash because you only makes sense once you've been paid for it? 

Richard Buckle 23:15

And cash is king.

David Parry 23:16

Well, there's probably another episode on that. We'll have to talk through our accounts viewer

Richard Buckle 23:21

But I think yeah, so but it is part of that. I think, when you're in a budget, you're comparing some numbers, some actual numbers to a budget, making sure that the people who are accountable for delivering those numbers actually understand them and can see them within a wider context is, is quite important.

David Parry 23:37

Another thing that crops up there with the the analysis of any difference variance analysis, if you want to go into that, sometimes we see people into explaining mode, rather than analysis mode, if you think there's a difference there. So they like to come up with quote, unquote, the excuse for why something is above or below where it should be, as long as you've explained it, Oh, fine. Move on. Well, that may be an appropriate response. If that was a one off. We all knew what was happening at the time. It's not gonna happen again. Yeah, the controller. But sometimes the appropriate response is to say, if this keeps happening, you know, maybe it's not that exact situation, but we keep having one offs.

Richard Buckle 24:11

You can't have exceptional items every month now.

David Parry 24:14

And sometimes you do. So there's got to be a trigger when you're reviewing the accounts against the budget or whatever yardstick that you actually decide to take some action. If the fourth month on the trot, we haven't hit the sales forecast, we're starting to get a bit worried about the pipeline. You got to open the debate at some point about whether we react, we weather the storm gets more funding to see this through or eat into the reserves, or do we start reducing the cost or changing strategy or something? So this is where I think businesses get fall out of love with the idea of the budget. Yeah, because even if you've got all the bother of making one and you comparing your results, if actually, all you do every month is just explain it away and nothing changes. Yeah, well, you could have saved yourself a lot of trees.

Richard Buckle 24:59

I suppose there's another thing that that could be around kind of what happens if you're, you know, you're in the budget, you know, we're in the budget, now we've made it we're in the year we're running the budget. What happens when you start bumping up against your limit on your budget? So if a marketing budget might be, I don't know, 5k a month ad spend, but you see a really good opportunity? Is there anything in that where companies

David Parry 25:24

I think there is, I can see very different attitudes, probably, depending on whether the person responsible has come from a bigger company, or maybe it was something public sector, or a smaller entrepreneurial SME, because the bigger companies tend to treat these budgets like they're cast in stone, you cannot exceed that, yeah, whoever this month, we've got to go under next month, otherwise, your jobs on the line. But the entrepreneurial approach would be to say, if there's an opportunity that presents itself, even if it's outside budget, as long as there's a rationale or return on investment of some sort, or some other driver, that's okay, just make sure you've got internal processes to escalate it. And, yeah, sure everybody's approved for that. So you shouldn't take budgets as absolute, black and white, don't spend more than in most cases, although it's certainly true that in large organisations and certainly public sector, they are treated much more like that. Depends on your context. Yeah,

Richard Buckle 26:17

I suppose it's Yeah, it is, is always context sensitive, I suppose for these things.

David Parry 26:21

So it talks about preparing the budget, running with them in flight and comparing and coming up with variances and changing actions. I think the other point worth noting is what's the benefit of having had a budget? Certainly, if you can show a track record. I'd say when you come to business sales, m&a activity and due diligence processes, or even like you talked about earlier, asking a funder for more funding, if you can show a track record where we hit our budgets every year. Then when you give them that next budget that just gives that sense that this business is under control. People know what the levers are, they managed to adapt accordingly. You know, it gives her a huge warm feelings

Richard Buckle 26:57

It'd confidence, isn't it?

David Parry 26:58

Yeah, confidence of of how it's being run

Richard Buckle 27:00

Absolutely. I think that's yeah, again, it's, it's maybe having that, you know, the budget review process. Does that happen? You know, do you sit down and review how the budget went last year versus, you know, as part of almost the preparation for the next for the next one?

David Parry 27:17

Well, that brings us on to how do you prepare them? And you mentioned earlier about getting other people involved. But the best versions I've seen are where you alluded to earlier, you have the budget holders, or the functional heads, present their own budget, and bring it together, which maybe the FDA has consolidated to come up with what does that mean for the business? Yeah, probably starts with the sales director, or maybe the marketing director saying this is, if we get this amount in, what money do you all need to deliver on it? Whatever, maybe bring it all up, when it comes to number at the bottom right hand corner, the spreadsheet, which invariably at first pass is unacceptable to the stakeholders, because everybody's throwing the kitchen sink at it saying, Well, yeah. So then you had a number of iterations. And it's up to each functional head to argue their case and come up with that return on investment argument for saying, No, I do need an extra person or this new piece of software, or whatever it may be.

Richard Buckle 28:07

And I think that's where it comes down to that process of really testing your assumptions and everything, isn't it? So that's, that's where the one line in the spreadsheet for, you know, staff or something doesn't doesn't really work, you've got to almost break that down and say, Well, okay, well, I need this person to do this thing and deliver on this and this person do this. And they're going to come in here, and there's going to be a recruitment cost associated with that, or, you know, those sorts of things. Really, to make it a credit, you got to present a credible case, haven't you really? 

David Parry 28:35

And if there's one thing I could change, when people do do their budgets is to make the assumptions more explicit, and the actions required, who's going to take what action to deliver this budget? It's not, the output shouldn't just be a set of numbers. Yeah, a budget isn't there to come up with a spreadsheet output? A budget is there to say if this is the version of the future that we're happy with? What do we have to do now? And through the year to make it happen?

Richard Buckle 29:00

Be great in a way when if you could actually come up with the task list, almost a checklist that comes out of it? Yeah, this is the financial plan to deliver this. We've got to do this in January, this in February this in, and these are the key tasks, and have we done those.

David Parry 29:13

And you may have come up with similar things where you've seen this depicted graphically, again, with some it's either called a rainbow chart or a walkthrough the Americans call it where you start with a bar at the beginning, which is how maybe last year when, and the one at the far right of the graph is how X is. But there's lots of ups and downs that get you from the first one to the second one. Each of those is a thing that you're going to make all the while happening. Yeah. So yes, that's important, then, 

Richard Buckle 29:39

Are there any other ways you can put budgets together?

David Parry 29:41

WellI think we should mention zero based budgeting. Not many people are a big fan of it. It takes an awful long time to do it's very thorough way of doing it. And you just strip it back to the bare bones and every single thing you put in the budget has to be justified. To do that, well, you've probably got to have activity based costing so all your overheads can be allocated to different activities, and it will take them awful lot longer every year to do it, there's no doubt that larger companies may choose to go that route. But I think for the audience we're talking about here, that SME, small entrepreneurial business, that's just too much effort. And it tends to, therefore be a more incremental approach. What did it cost last year put a bid on for inflation or wage rises in the recruits take off the victim of doing any more? Where does that leave us? And does that work?

Richard Buckle 30:23

Yeah. I've always found that they do. They evolve quite quickly, when you actually start to sit down and really look at a budget. You can you can take quite a glib, well, that's what it was last year. That's just, you know, get it over with quickly put a couple of percent on here and there. But if you really do take the time per day aside or something, you know, again, we're talking to SME kind of audience here. But, you know, day or two aside to really think through Well, what what's going on with, you know, staffing, or

David Parry 30:55

Every year we pay x for this thing? Do we need it? 

Richard Buckle 30:59

Do we understand things, you know, that office, or that bit of storage space?

David Parry 31:02

That piece of kit or especially with all of these SAAS licences that we accumulate? How many of those do we still need for the last year? And that brings us to when should you do it as well, because you wouldn't believe how many companies I see putting their budget together in month one or two of the financial year. So by the time they've signed it off, you know, 10/20% of the is already gone. Yeah. So I would say start maybe three months before, so for people with calendar years, maybe start thinking about it in September, October time. The the April starts, it's a great sort of January back to work sort of after Christmas activity. What about the main pitfalls? What goes wrong with budgeting?

Richard Buckle 31:42

Too high level? I mean, you touched on that a number of times in this but it's just

David Parry 31:45

This is one line, staff has one line, overheads is maybe three or four lines. Yeah, it's, what you can do that. You get a variance, it could be a million different things, 

Richard Buckle 31:54

Not taking into account, things like product mix. Those sorts of thing.

David Parry 32:01

The other thing that I've seen recently, actually is where the assumptions you made in the budget go out of date very quickly, you mentioned earlier, okay, maybe time for a re budget, don't run just to forecast, that type of thing, change or if you're expecting a big order to land in month one, but it came in earlier, and it's now fallen to last year. So you know, that's gonna fundamentally flaw all of your year

Richard Buckle 32:24

Use it or lose it mentality.

David Parry 32:26

Yeah, I suppose that's why budgets have got a bad name, especially in a public sector or large company environment where you're a cost centre, not a profit centre. And you've been given an amount of money to spend. And the threat is if you don't get through that money by the end of financial year, then obviously, you didn't need it, so you won't get it next year. And how many businesses do we work with where for the last two or three months of whichever financial year we're talking about, there's a spending bonanza. And for some businesses, it's November December, some businesses it's more like February, March before the public sector end of year. Some it's around August time because the end of the education sector, financial year so it's it's bizarre when you look at now businesses how cyclical they are, how seasonal our sorry, because of these financial year effects.

Richard Buckle 33:10

And if you do have budget leftover, you can email me at richard.buckle@wellmeadow.co.uk

David Parry 33:15

We will find a good use for it, I think the last one to mention as well, people will have heard of the term sandbagging. And I think everybody's guilty of it to some degree or another. But it's where you overall underestimate how much you, you need to make it easier for you to deliver on your budget. A little bit of putting in the contingency that you might not need. And I think it's up to the budgetary process and the team together to collectively try and flush that out. It's fine having contingencies but don't come up with a completely fictional budget, just so you can prove you've beaten it. But unfortunately, bonuses are tied on this sort of thing, then that sort of behaviour drives it

Richard Buckle 33:55

So I guess the big question, is it okay, not to have a budget?

David Parry 34:00

Well, maybe, maybe a bit, like we said earlier about? Sure. Daily cash flow forecasting, you didn't have to do that. So there are probably circumstances where if you're a smaller business, where the owner is making nearly all of the decisions or has oversight, the decision of the owners, if you're profitable, if you've got enough cash, if your business is quite stable, you should probably, you know, be foolish of us to say you don't need one, but you could get away without having one and many businesses do. If those circumstances are true 

Richard Buckle 34:30

I think maybe to maybe take it a step further. So you, you probably have a budget, we just haven't written it down in that instance. Yeah, in your head, you've probably got an idea of, well, I know the sales are going to be this and I can afford that. And it's kind of roughly, you know, just gut feel feels right. But it's not articulated anywhere.

David Parry 34:50

You've got your handle on the business and you know that your labour costs should be about 40% your sales material costs 20% And there's 20% overhead and the rest is for me, then, you know And yeah, you can sort of clock that, can't you have your month, even if it's just watching the bank statement as to what's coming in and out and looking at the payroll of your every week, every month? So yeah, I think there are reasons why somebody may legitimately decide not to bother committing a budget to paper. But there are also lots of reasons when you're gonna have to do 

Richard Buckle 35:18

you're gonna have to do. Yeah, I think I think it's probably a wise thing to do. I think businesses that run themselves just off the bank balance, bit scary,

David Parry 35:31

Maybe introduce those businesses to the concept of a balance sheet. Make them realise how important that might be. Liabilities hiding in there. Yeah. Okay, so for those of you not doing budgets, maybe that's okay. But Just have a think about everything we've said, and maybe there's something in there that at least gets you doing a version of one, start off the process. Good. Well, that's it for budgets, not the most exciting of subjects, but it's one of those things that growing companies I think have to consider as they grow because it's going to be a part of their future as they go into one of those next stages of growth. Well, thank you very much. Again, for listening. This is The SME Growth Podcast from Wellmeadow Please Subscribe, Like, Share the podcast with your friends and most importantly, tell all your business colleagues that were here and that were worth a listen, and good luck with your businesses. If you want some more information on the graphical p&l and accounts viewer, then please go to our website at wellmeadow.co.uk Till next week.