How are you doing (financially)?

We’ve written previously about the value in creating a budget and the  of doing so. The final piece of the puzzle is how a budget can help answer the question – “how am I doing?”​

Most business owners have their own way of measuring their success. It could be cash in the bank, number of clients on the waiting list, how many holidays they’re able to take. Metrics like these are really important, as they’re often the reason the owner got into business in the first place. It can be hard to measure these in terms of performance so this article will describe a few standard ways of measuring progress that might apply to everyone in these situations.​

Reporting on your business progress is really important. You can use Xero to create monthly reports that can be customised however you like; check out their article here which explains how to customise a report. Customising is useful because you can change the date range you report over, group expenses into categories, and report income against separate expenses in sections. You can also customise a report to report against your budget or prior period figures.​

We recommend understanding what your Key Performance Indicators (KPIs) are before you begin. Your KPIs are those metrics which you track in detail and what you’ll be looking at in your report. Our article here explains how to figure out which ones matter for your business.​

This is where your budget comes in. A monthly profit and loss report can show you how your business is performing, but a budget is the way you can compare how you did against how you were planning on doing. A straightforward way of looking at this would be preparing a monthly budget variance report. This would display in 3 columns:​

Budget variances can be slightly confusing, as negative can be good in some cases but bad in others. For example, if your actuals versus budget for sales show a negative number, that means that you’re under budget for your sales, which isn’t ideal. But if you see a negative number when looking at expenses actuals versus budget, then that means your expenses are tracking under, which could be a good thing (or also not – read on).​

The absolute most important thing with budget variances is to understand why that variance has occurred. Just because your expenses are under budget doesn’t necessarily mean you’re doing as well as it looks, you could have budgeted for a large expense and not yet received the bill. So it is just a timing difference. ​

The simplest way of understanding budget variances is to figure out what you want to track:​

So long as you understand why a variance has occurred, and you’re confident it isn’t a material ongoing effect, then there is no need to update your budget. Your budget is the plan you made so reporting against it rather than manipulating it to match each month is where the value is.​

When comparing your actuals to budget you need to think about what is actually useful for you to see, and how your business operates. For example for many charities we work with, a budgeted expense line is actually the maximum allowable spend for the year. So looking at how much is spent each month against what is budgeted isn’t very helpful. They want to know how much they have left to spend for the year for each expense item. This creates a very different report, a budget remaining report, which shows:​

One note with this method – be careful to look at items line by line, as looking solely at totals can mask overruns in some areas. If your organisation has a policy of spending all budget, then any overruns should not be allowed to offset underspends unless this has been agreed. Otherwise you’ll reach the end of the year and have spent far more than you were planning.​

A third option is to look at how far through your total budget you are for the year to date with a year-to-date budget variance report by:​

This is a good method for businesses that have operations that are really similar month to month. ​

As mentioned above, the point of a budget is to see how you perform against the plan you made. Therefore there isn’t much sense updating your budget every time you see a variance. However the following circumstances are indicators that it might be worth making a change​

Updating your budget for large, recurring changes will give you the opportunity to look ahead and make sure your business is still healthy, or if there are other downstream effects that mean there are other changes you’ll need to make too.​

It can also be of use to review your performance against other businesses in your sector to see how you’re tracking. In the Wealth section of Beany if you have connected up your Xero account we can report your sector performance data. Sector performance usually incorporates a large range of business sizes so it is often most relevant to look at absolute (percentage) values rather than total dollar values (e.g. someone who is a web developer contractor would be in the same sector as a large web development firm, so look at total sales dollars as a performance metric wouldn’t give a particularly useful result). Speak to our Support team if you need any assistance setting up your Xero integration.​

Reporting against your budget can suddenly create three times the amount of figures that you started with and seem overwhelming.​

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world. ​​

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.​