Why budgeting & reporting is critical for your business

The key to sustained business growth and profits lies in meticulous planning and informed decision-making. Central to this process are budgeting and financial reporting. So why is it that so many small business owners overlook these key practices?

Why Budgeting Matters

1. Strategic Planning

Budgeting is more than just a financial exercise; it is a strategic tool that helps business owners set clear objectives for the year and map out a path to achieve them. Without a well thought out plan to guide you, whether you achieve your goals for the year will more likely come down to luck, than good planning. By establishing a budget, a business can allocate resources efficiently, prioritize spending, and ensure that funds are available for essential operations and growth initiatives.

2. Financial Control

A well-constructed budget provides a framework for financial control. It enables business owners to monitor income and expenses, ensuring that spending aligns with the company's financial goals. This proactive approach helps prevent overspending and allows for timely adjustments in response to changes in your competitive environment.

3. Cash Flow Management

One of the most critical aspects of running a small business is managing cash flow. A budget helps predict cash inflows and outflows, providing a clear picture of the company’s liquidity. This foresight allows businesses to plan for periods of low cash flow, ensuring they can meet their obligations without compromising operations or having sufficient drawing for personal needs.

4. Performance Measurement

Budgeting sets benchmarks for performance measurement. By comparing actual results against budgeted figures, small business owners can assess their performance, identify variances, and understand the underlying reasons for discrepancies. This analysis is crucial for making informed decisions and improving future performance.

The Role of Financial Reporting

Your annual budget forms an integral part of your monthly or quarterly financial reporting pack. The type and detail of information included in your financial reporting pack will depend greatly on the size and complexity of your business. However, it is important to get into the rhythm of reviewing the financial performance of your business for the following reasons:

1. Transparency and Accountability

Financial reporting brings transparency and accountability to a business. Regular financial reports, such as profit & loss statements, balance sheets, and cash flow statements, provide a clear and accurate view of the company’s financial health. This transparency is essential for building trust with stakeholders, including investors, lenders, and your management team.

2. Informed Decision-Making

Accurate financial reporting is the backbone of informed decision-making. These reports offer valuable insights into your business’s financial status, helping you make data-driven decisions rather than relying on gut instinct and guesswork. Whether it’s evaluating the feasibility of a new project, understanding the profitability of different products, or identifying cost-saving opportunities, your financial reports are indispensable tools.

3. Compliance and Risk Management

Financial reporting ensures compliance with regulatory requirements and helps manage risks. The Australian Taxation Office (ATO) requires businesses to maintain accurate financial records and submit regular reports, including Business Activity Statements (BAS). Late or non-compliance can result in significant penalties and interest. Additionally, your financial reports, particularly your cashflow forecast, help identify potential risks early, such as not having sufficient cash flow to meet a large, one-off liability. A regularly updated cashflow forecast gives you the time and visibility to implement strategies to alleviate this.

4. Attracting Loan Finance

Whether it is for your business or a personal home loan, lenders rely on financial reports to assess the viability and profitability of your business. Detailed and accurate financial reporting demonstrates a company's stability and growth potential, making it more attractive to potential lenders. This can be a critical factor in securing funding for business expansion or family matters.

Why so many small business owners overlook budgeting and reporting

By embracing robust budgeting and financial reporting, small business owners can navigate the complexities of their business landscape, drive sustainable growth, and achieve their long-term objectives.

Despite such clear benefits, many small business owners struggle to implement these practices effectively. Understanding the reasons behind this challenge can help in developing strategies to overcome these obstacles and promote better financial management among small businesses. The following are the most common reasons for inadequate or non-existent proper financial reporting:

1. Lack of Financial Literacy

Many small business owners lack formal training in finance and accounting. This deficiency in financial literacy can make budgeting and financial reporting seem daunting and complex. Without a solid understanding of financial principles, business owners may feel overwhelmed and uncertain about where to start.

2. Time Constraints

Running a small business often means wearing multiple hats and juggling numerous responsibilities. With so many pressing tasks demanding their attention, small business owners may struggle to find the time to dedicate to thorough budgeting and financial reporting. As a result, these critical activities are often deprioritized or neglected entirely.

3. Limited Resources

Small businesses typically operate with limited resources, including personnel and financial tools. Many cannot afford to hire dedicated financial professionals or invest in sophisticated accounting software. This lack of resources can lead to inadequate financial management practices, as owners attempt to handle these tasks on their own with limited expertise.

4. Perceived Complexity

The processes of budgeting and financial reporting can appear complex and intimidating, especially for those without a background in finance. The perceived difficulty can deter business owners from engaging in these practices, leading to a reliance on informal methods that lack accuracy and reliability.

5. Short-Term Focus

Small business owners often focus on immediate survival and short-term gains rather than long-term planning. This short-term mindset can result in a neglect of strategic financial management, including budgeting and financial reporting. Owners may prioritize daily operations and cash flow management over comprehensive financial planning and analysis.

6. Fear of Unpleasant Realities

Facing the financial realities of a business can be uncomfortable, particularly if the business is struggling. Some owners may avoid proper budgeting and financial reporting out of fear of confronting financial problems or acknowledging poor performance. This avoidance can create a cycle of financial mismanagement and further challenges.

7. Inadequate Support

Small business owners may lack access to adequate support from their current advisory services. Their accountant may have helped build a budget at the start of the year, but without ongoing guidance and support, many business owners struggle to understand and maintain effective budgeting and financial reporting practices. This lack of support can leave owners feeling isolated and unsure about where to turn to for help.

8. Overconfidence in Informal Methods

Some business owners may rely on informal methods of tracking finances, such as a mental note of their bank balance, simple spreadsheets, or ad-hoc record-keeping. Overconfidence in these methods can lead to inaccurate financial data and hinder the development of robust budgeting and financial reporting practices.

How an outsourced CFO can help

CFO is short for Chief Financial Officer, and this is the most senior and experienced finance professional in most big businesses. A CFO provides high quality finance, accounting, commercial and operational advice to a business. Not surprisingly, a CFO comes with a hefty salary and cost to the business, and so it is usually only larger businesses that hire a full-time CFO.

Smaller businesses, particularly those that are looking to grow and expand services, also need the advice and services provided by a CFO but not on a full-time basis. This is where an outsourced option comes into play. An outsourced CFO could work on a one-off project or on a retainer, for a much smaller number of hours per month. This means the cost is substantially lower than hiring a full-time resource.

An outsourced CFO would be able to build your company budget and set up monthly or quarterly financial reporting that is suitable for your business needs. In addition, they would be able to advise on ways to improve business profitability and cash flow, and work with you, the business owner, on strategic growth plans.

Why should I choose GearChange Business Advisory?

At GearChange Business Advisory, our passion is supporting business owners to turn their dreams and goals into an actionable business plan that gives you the best chance of success, and the future you deserve for you and your family.

Our business is led by Steven Nicholson who has over 30 years of experience helping small and growing businesses achieve their business goals by advising and supporting business owners with commercial advice and insightful financial information.

Steven’s extensive experience has taught him two key things that ensure a successful outsourced CFO engagement:

1.      All businesses are different. Rather than a one-size-fits-all solution, Steven will always tailor the services to meet the specific requirements of each client, ensuring that their financial strategies align with their business objectives.

2.      Build a trusting relationship with the business owner. Steven’s relaxed and honest communication style allows him to lower barriers quickly and show the value he can add as a trusted business advisor. This is critical to understanding the true worries and drivers of a business owner and ensuring that these are front of mind in any solutions provided.

What should I do next?

By outsourcing budgeting and financial reporting to an expert in the field, you can focus on what you do best – running and growing your business.

Get in touch with GearChange Business Advisory for a no obligation chat to see if we can help your business move up through the gears.

Initial free CFO consultation