Your Future Business Story, shorthand budget, translates and converts your business story and action plan into financial terms.  Check out my previous podcast which talks about why your business plan is a smart way to map out your future story.

In this episode of ‘I Hate Numbers’ I am going to be talking about developing, producing and using your budget to help turn your business dream into a closer reality

Why you need a Budget

Your budget is your 12-month footprint, that normally connects with your three to five-year business plan.

Budgets create accountability and targets.  Clear targets motivate people to high performance levels.  The numbers in your business are used to create a budget, a plan, an aspiration.

Budgets are your stories of tomorrow. They show choices, aims and objectives. Targets are typically shown in terms of money, i.e. income, costs, and profits.  Targets play their part in motivation and performance.

Building Your Budget

In this podcast I talk about starting with your business story and then using number Lego bricks to build the numbers you need to know.

Actions have consequences, and in the world of business, business have consequences for your numbers.  Sales and costs, profit and cash all come money in and money are affected by our actions.  Listen to find out more

Monitoring and Making Judgements

“Your numbers are there to measure how well your business journey is going.  Use your numbers to translate your business story into financial outcomes.  If income is more than expected, and/or costs less expected then this is over performance.  If income is less than expected, and/or costs more than expected then this is under performance.

A cliched phrase is what ‘gets measured gets done’.  While we are talking clichés let us throw in another, ‘manage what your measure’.  When you start measuring and managing using numbers, performance improves.  Do not use any old measures, use ones that are controllable, relevant and meaningful to your business.

Good to Know

Numbers can be used to set targets.  If you have targets you can control and improve.  Be careful though, if targets are too tight and difficult then getting the best from your team will not happen. Looser, or easier targets, which have little motivational effect, will usually be achieved.

What Next

Grab a coffee, make yourself comfortable, sit back and listen.

I love doing this podcast and sharing my love of Numbers with you.  Check out the link to subscribe and do not miss an episode.  Help me spread that Number Love by downloading it, listening, and taking action!

In This Episode

• Understanding the importance of your business story to create your budget
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• Knowing how to assemble the key parts of your budget, using number Lego
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• The vital role that your budget plays in delivering your business vision
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• Developing your own Numbers confidence and decisions
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• Take more control of your numbers to help make you money, survive and thrive

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. Welcome to another weekly episode of I Hate Numbers. My name is Mahmood, and as you know, I’m far from hating numbers. I think they're brilliant. You need them in your business for making you money. It's the friend that will never lie to you, and it's the friend that will guide you through times of calamity, prosperity, and calm to get you to the destination that you so desire.

Last week's episode, we talked about business planning. We weren't talking about straitjackets, we were talking about the way that takes all those crazy, lovely, brilliant thoughts in your head, takes them out of your gap between your ears and puts them into something that sounds cohesive, something that sounds practical, something that sounds deliverable, and something that's going to get you to the point that you so desire.

What we're going to focus on this week's episode is how you take that plan, whether it's a 12-month perspective, whether it's a two-year perspective, or a three-year perspective, whatever your time frame is that you've chosen, and how do you take that business plan that says, who are my customers? How do I actually get to that point?

You know, what's my customer avatar look like? What are the key challenges that I've got? What are the resources that I need and tells me financially, fundamentally, what does that look like? And I'm going to use the word budget here, and when we hear the word budget, most people go a bit crazy and they think, oh my God, I don't want to do a budget.

I don't want to constrain my activities. Don't think of a budget as a straitjacket. Your budget is fundamentally what you said you're going to do, what you said you're going to achieve, your plan of attack, so to speak, in the next, say, 12 months, and typically, what does that mean in financial terms. So, your budget is your aspiration. Your budget is your accountability partner.

Your budget is there to say to you at certain points during the course of the year, at certain milestones, every, say, typically every month, to say, okay, this is what you said would happen. This is the financial impact of what you said was going to happen by what you're going to sell, what you're going to spend, the actions that you take or the actions that you don't take, and this is where you should have ended up.

Okay, let's check it out, shall we? Let's compare that where you thought you would be based on your aspirations, based on your action points. See where you've ended up. If you are exactly where you said you would be, if you've done exactly what you said you were going to, if things haven't gone out of control, tick box, pat on the back, and your accountability partner will say, well done.

If it's not gone quite to plan, so you've not sold as much as you thought you would do, you spent more money than you thought you would do, then your accountability partner's going to take you, put a comforting arm around your shoulders and say, why is it you spent more than you thought you would do? Why did you not make as much money?

It doesn't mean it's going to beat you around the head with a wet fish. It just means what's gone not quite according to plan. Once we figure out what's gone wrong, if you want to use that term, then we can put it right. What's the alternative? The alternative is money runs out the bank. You're not keeping an eye on it.

Those aspirations, those dreams don't get realised. And before you know it, the path that you set yourself in at the beginning hasn't quite materialised, and it'll probably be too late to turn it around. So, for me, a budget is a key thing to help deliver what you said you wanted to deliver. You can always change these things.

You can always modify them, but for me, as a bare minimum, a budget of some description is a real key element in getting your business successful and ultimately, as we've said before, to help make you money. What I'm going to focus on the rest of this podcast is to tell you about the nitty gritty, the how do we do it.

Most people, when I speak to them, think, okay. How do we, on Earth, know what's going to happen, you know, next month, the month after? It's impossible. And you're dead right. We're not talking about crystal ball gazing. We're not talking about give me a perfect prediction. If you could predict the future with 100% clarity, then give me a shout at the end of this podcast.

Drop me a line. We'll make a fortune on the stock market predicting what life is going to look like. It's not like that, and that's not what we're talking about. Now, in the beginning, before we even get down and dirty with numbers, before we get excited about what does it look like in financial impact, let's think about what this budget is going to tell us.

First of all, we need to make a note. So, if you're a big organisation, you've got a team that's going to help you. Fantastic. If you're a solepreneur, if you're a startup business, the process is pretty much the same. The resources you've got to access may differ. So, write down the assumptions that you have taken into account for your next, say, 12 months.

And in most cases, a budget is a 12-month footprint guiding you towards your nirvana, your aspirations, your business plan. So, we're looking at typically what does the next 12 months look like based on what we said we're going to do. So, consider what key assumptions are. So, are you going to introduce any new products?

If you've got a staff team, what are you going to put aside as any pay rises that might be going on? What do you anticipate in terms of supply cost increases? Do you think there's going to be any changing regulation that's going to impact on your sales line here? Typically, when you are in the hospitality sector, when regulations came in about

smoking, where you were allowed to smoke, that had both a positive and a negative impact on businesses. Some, it presented an opportunity to bring more people into that environment. For others that might have been more what they call wet-led establishments. You know, they saw that as an impact on their bottom line, on their sales line.

So, think about, for you, line in the sand as of today, what's the key assumptions you're making about your future. Level of funding, level of costs, pay rises, numbers, you know, investments that are required. And don't worry too much at this stage about getting the anal detail, but make a note of it. Remember, when you look back on this in a month's time, in two-months time, whatever far in the future, you're looking back on it,

when you evaluate what's happened against your expectations, you want to know why. Look at your assumptions, look at your notes and think, ah, this is what I thought was going to happen. Didn't quite happen to that. It's a good explanation and you're not going to beat yourself up too much. Most difficult number to predict, forecast, come up with in a budget is in terms of the money coming in.

What are you going to sell, the value of that? Let's explore that in a few moments, and as a quick sanitary reminder about the importance of budgets, I need to emphasise this fact, it's about risk minimisation. It's about preventing things going wrong and trying to stop them before it's too late. It's about communication so you can tell yourself what you said was going to happen.

If you're a larger organisation, it's a way to tell your team that buys into that plan about what your task is, what you set yourself out to be. Where you can, participation is really quite a key, important ingredient. Let's go back to the income side. So, how do I know what I'm going to sell? Well, go back to your business plan.

Go back to your story. Get the story straight. And for me, what I'd really like people to do is when you come up with an income budget i.e. how much am I going to generate by way of turnover, by sales, what's that financial value going to be? I like to adopt what I call the sales Lego approach. Think of your budget as made up of individual building blocks.

If we are a restaurant, typically we may be saying, okay, we've got so many covers that we have, so many bums on seats that we can accommodate at one point. That's one side. The other side, I can look at what I'm selling. If I want to be just a, a finger in the air job, I could work at an average price per each head for each person that comes into the restaurant.

So, I know numbers that I'm building up over time, and I know how much I'm charging or will be charging for each person, then I can come up with a figure overall for sales. If I'm a service-based business and I'm selling my time, my intellectual property, I might actually think, okay, let's have a look at what I'm doing.

I'm billing my time based on number of days perhaps, so how many days do I have available? How much am I charging per day? The two together give me an idea of the overall sales. If I'm selling products, workbooks, courses, same thing. The building blocks are, how many of that thing and how much per each item are you selling?

Ideally, a lot of the effort goes into the building blocks at the beginning, and I would suggest if you've got more than one type of revenue stream, break it down into groups. Revenue, income sales, pick the title that you prefer, drives the rest of the budget. Having arrived at that, and again, my advice would be to look at the picture maybe for the entire year, so based on if you've got a history.

I don't mean, have you got a personal history? If your business has got a history, use that as a guidance, but don't say, I'm going to do the same as last year. You know, are you going to improve on last year? Are you going to do the same as last year? Because that's what's happening in your business right now.

Are you looking to cut back? Are you looking to diversify? So, use the history as a guide. If you've got no history, if you're a new startup, well do some market research. At some point, take a punt on what you think the demand will be. How many people are likely to buy that? And I'm going to talk about the logicality of the story towards the end of this podcast.

Having got that, you got it for a 12-month picture. Then what we do, we think about what our costs are connected to that revenue activity. Now, if you go back to previous podcasts, we've talked about costs. We use that phraseology about how do they behave, not whether they're naughty or nice. So, certain costs, if you remember, are fixed.

So, whatever we do, we sell nothing at all. Some of those costs will still be there. So typically, resource costs like salaries, rental costs, costs of leasing, any equipment that we've got, will stay the same. Doesn't matter what goes on in our business, whether we do nothing at all in terms of selling, of where we sell quite a lot.

Some costs fluctuate. They're variable. So, if I typically think about my hospitality business, my restaurant, perhaps a bar or something, what's going to happen is that every time I sell something, that means I have to buy more products in, more materials, more inventory, more stock. Those costs are classified as variables. Group the costs that fluctuate according to what your business activity is.

Put those to one side. All the costs that are static and constant and fixed, put across the other side. Building up the story then becomes much easier. Once you produce the overall income based on your Legos, your sales Lego, once you've, then think about the cost that you have. So, the cost typically will be what I would call the cost of provision.

So, if, again, if I'm a hospitality sector business, my costs that are associated with that would be the cost of buying in the food, the drink. If I'm a consulting business, a service-based business, then it will be perhaps any consultants that I'm using to deliver courses and training. It might be books and materials, workbooks that I'm buying in or making myself, if I'm a manufacturer making these wonderful things like widgets or phones or microphones, he says, pointing at his podcast microphone.

Well, the cost of raw materials will be something that goes up or down according to the volume of manufacture. Now, typically costs are associated with the provision, so we think food, hospitality, we think medication, hospital, we think car spare parts, garage. We think consulting, consultants that we bring in when we deliver. We think construction, we think bricks, cement, provision of labor when we build a house, dig foundations, whatever one does in that construction arena.

There are those, the general support costs. Some people call them overheads. I prefer the term support costs because it gives you the idea you're supporting the business. Once you produce those numbers, you then are going to produce statements of profitability, statements of cash. Cash is that key thing that keeps the business going.

It's the engine oil of the business. It’s the fuel in the tank that powers our business. No cash, your journey's going to come to an abrupt end. Now, when we look at it, we then might want to break that down into when does it happen? Typical time frame. Once we've got a budget for the whole year, we can literally say to ourselves, okay, what does that look like in January?

What does that look like in February? What does that look like in March? Have a look at it. Look at the cash impact, and then think, that looks brilliant. Is it realistic? Does it flow from your story? Does it flow from your aspirations? A much better way in alternative ways, a bit time-consuming, but it's a good way if you can think of your story, literally building up that says if it's a new product arena, if it's a new business, if it's a developing business or a static business, that typically says in the month of January, this is what I reckon I'm going to be selling based on my marketing engagement activities, based on what's in the pipeline.

Overlay that with the value of each sale and that builds up the revenue, the sales in that particular month. That, for my mind, is a much better way of looking at it. Depending on the scale of your organisation, you might actually want to be looking at 12-month cycles and then at the end, break it down as to what that looks like on a month by month basis.

I've worked in environments where we do it on a week by week. Most businesses, in my opinion, a month by month is normally pretty sufficient. If you are a retailer, if things are quite volatile or quite fast-moving, then you might want to be thinking a week by week breakdown is probably something that's closer to what you need. In most cases, month by month is perfectly fine.

Now, the power of the Lego bricks, by the way, if it looks too unwieldy, if it looks an impossible aspirational target, so cross reference that to what you did the previous year, if assuming you've got a history, then you can go back and rebuild the Lego bricks. So, can you play around with a surprise per each Lego brick,

each item? Can you play around with the numbers of each items that you're going to do? You can only do that once you've created a picture in the first place. So, if it's your new experience of putting a budget together, just do it. Look at it. Take a step back. What does it look like? Can you achieve that? Does that look deliverable?

Because that's your targets, everybody. That's your business buddy. That's your milestone that's going to say each month, absolutely, brilliantly, well done. Slap on the back. Look at what you've actually done against what you said you were going to. Draw that analogy I've used before. Think about the gym. Your accountability partner, your coach, the person at the other end that says, you said you were going to lose so many pounds this month.

You haven't done that. What's going on? Let's look at your diet. Let's look at your motivation. Let's look at, set your exercise regime and figure out what we can do to put it right. If you have a hit target, it might say, great, well, we can set the exercise up. You're doing brilliantly, let's take it forward.

Financial plans, everybody. Typically, budgets are plans. Planning is good. And furthermore, budgeting is planned with numbers. Have you got some value from this podcast? My name is Mahmood. I'm going to be signing off here when we come back next week we've got some delights in store for you. If you love the broadcast, which I hope you do, you've taken something from that, have a listen.

Share it with your colleagues, share it with your friends. Love those downloads. Give me some feedback. Have a great week everybody. I'll see you in podcast heaven next week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it

if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.