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Every small business needs a budget, but preparing one is only half the job. Business accountants in practice have an important role to play in helping clients understand their numbers, plan for expenses and avoid running out of cash.
Most small business owners know how much money came into their business last month. They know what they paid in salaries, rent and other expenses. But ask them whether they will have enough money to pay salaries in December, settle their next VAT payment or buy stock for a large order, and the answer is often less certain.
This is where a proper budget makes a difference.
For business accountants in practice, preparing a budget should not simply be an annual exercise where figures are entered into a spreadsheet and sent to the client. It is an opportunity to help business owners understand what lies ahead, make better decisions and avoid financial problems.
A good budget tells a business owner three important things: how much the business expects to earn, how much it will cost to operate and whether there will be enough cash available to pay the bills.
Start with what actually happened
The best place to start is with the client's financial information from the previous 12 months.
Look at the management accounts, income statement, bank statements and accounting records. Identify how much the business earned, what it spent and which expenses increased during the year.
For example, a client may have spent R120,000 on electricity last year. Simply budgeting another R120,000 would not make sense if electricity prices have increased or the business has installed additional equipment.
The accountant should discuss these changes with the client and adjust the budget accordingly.
The same applies to rent increases, salary adjustments, insurance premiums and supplier price increases.
Last year's figures provide a starting point, but the budget must reflect what is expected to happen in the coming year.
Sales must be realistic, not wishful thinking
One of the biggest mistakes business owners make is expecting sales to increase without having a clear reason for that increase.
A client who achieved R3 million in sales last year may want to budget R4 million for the next year. But where will the additional R1 million come from?
Will the business gain new customers? Is it increasing its prices? Has it secured new contracts? Is it introducing another product?
These are the questions accountants should be asking.
Sales should also be budgeted month by month. A retail business may earn significantly more during November and December, while a business supplying schools may experience lower sales during school holidays.
Using the same sales figure for every month can give the owner a misleading picture of the year ahead.
It is better to prepare a realistic budget that the business can achieve than an impressive-looking budget that has little chance of becoming reality.
Understand what it costs to make a sale
Once sales have been estimated, the next step is to calculate the direct costs of generating those sales.
For a manufacturing business, these may include raw materials, production labour and packaging. For a retailer, it will mainly be the cost of stock sold. For a service business, it may include subcontractors or other costs directly related to providing the service.
Consider a business that expects monthly sales of R400,000.
If its direct costs are 55% of sales, it will spend R220,000 to generate that income. This leaves R180,000 in gross profit.
That R180,000 must still cover salaries, rent, insurance, administration and other operating expenses.
If these expenses total R150,000, the business is left with a monthly profit of R30,000 before tax.
This is useful information for the owner. It shows how much the business needs to sell to cover its costs and how quickly profit can disappear when expenses increase.
It also gives the accountant an opportunity to discuss pricing. If supplier costs increase but selling prices remain unchanged, the business may be making less profit on every sale.
Do not forget the expenses that only happen once or twice a year
Monthly expenses are usually easy to identify. Rent, salaries, internet and software subscriptions appear regularly in the accounting records.
The expenses that cause problems are often those that do not occur every month.
Think about annual insurance payments, software renewals, equipment repairs, bonuses, 13th cheques, provisional tax payments and vehicle maintenance.
These expenses should be included in the months when they are expected to be paid.
A business may comfortably cover its normal expenses every month but struggle in December when bonuses become payable or in a month when several annual expenses fall due.
Accountants should also make sure that the owner's remuneration is properly included. If an owner works full-time in the business but takes little or no salary, the budget may show a profit that does not reflect the true cost of running the business.
A profitable business can still run out of cash
This is probably one of the most important lessons accountants can teach their small business clients.
Profit does not mean there is money in the bank.
Return to the manufacturing business earning R400,000 in monthly sales and making R30,000 in profit.
Now assume its customers only pay 60 days after receiving an invoice.
The business must pay employees, purchase materials and cover operating expenses long before it receives payment from customers.
If it starts a large new contract in January, it may need to fund two months of expenses before receiving the first payment in March.
The income statement may show a profit, but the bank account could be running empty.
This is why every budget should be supported by a cash flow forecast.
The cash flow forecast should show the opening bank balance, expected customer receipts, supplier payments, salaries, VAT, loan repayments and other payments for each month.
It should then calculate the expected closing bank balance.
If the forecast shows that the business will run short of cash in February, the accountant and client can deal with the problem before February arrives.
The client might negotiate a deposit from a customer, arrange an overdraft facility, collect outstanding debts sooner or delay a non-essential purchase.
Finding the problem early gives the business more choices.
What happens when sales do not go according to plan?
No budget will be completely accurate. Customers cancel orders, suppliers increase prices and unexpected expenses arise.
Accountants should therefore encourage clients to prepare more than one version of their budget.
For example, what would happen if sales were 20% lower than expected?
A business expecting R400,000 in monthly sales would instead earn R320,000.
Assuming direct costs remain at 55% of sales, gross profit would fall to R144,000. If fixed operating expenses remain at R150,000, the business would move from an expected R30,000 monthly profit to a R6,000 monthly loss.
That is a R36,000 difference in one month.
This simple calculation can change how a business owner approaches spending, hiring and taking on additional debt.
The accountant can help the client identify which expenses could be reduced if sales decline and how much cash should be kept aside for difficult months.
The real value comes from reviewing the budget every month
A budget prepared in January and never opened again has very little value.
Accountants should encourage clients to compare their actual results with the budget every month.
Suppose a business budgeted R80,000 for salaries but the actual expense was R95,000. The accountant should establish why.
Was an additional employee appointed? Was overtime higher than expected? Were temporary employees used? Is this a once-off expense or will it continue every month?
The same approach applies when sales are lower than budgeted, stock costs increase or customers take longer to pay.
Not every small difference needs a detailed explanation. The focus should be on differences that affect profit, cash flow or the future performance of the business.
At least every quarter, the budget should be updated using the latest information.
If sales have been consistently lower than expected for three months, there is little value in continuing to forecast the original sales figures for the rest of the year without good reason.
The forecast should reflect what the business now expects to happen.
Make the budget something the client understands
Many small business owners do not have an accounting background. Presenting them with a spreadsheet containing hundreds of figures may not help them make better decisions.
Accountants should explain the budget in simple terms.
Instead of only reporting that gross profit has declined, explain that the business is keeping less money from every sale because stock or production costs have increased.
Instead of only reporting a negative cash flow forecast, explain that the business may not have enough money to pay its bills in a particular month.
Show the client which months are likely to be difficult, what expenses are increasing and how much sales must improve to achieve the expected profit.
A budget does not have to be complicated to be useful. For many small businesses, a well-prepared spreadsheet with monthly sales, expenses, profit and cash flow is enough.
What matters is that the figures are realistic, regularly reviewed and understood by the person running the business.
Business accountants should help clients plan, not only report
Business owners often approach their accountants when something has already gone wrong. They need help because cash is running low, tax payments are overdue or expenses have become too high.
A proper budgeting process gives accountants the opportunity to have these conversations much earlier.
Instead of explaining why the business ran out of money, the accountant can show the owner that a cash shortage is expected in three months and help them prepare.
Instead of reporting that profit has fallen, the accountant can identify rising costs and help the owner review prices before the problem becomes serious.
For business accountants in practice, this is an important part of the value they can offer clients.
Preparing annual financial statements tells a business owner what happened in the past. Preparing and reviewing a budget helps the owner decide what to do next.
The aim is not to produce a perfect budget. It is to give the business owner enough information to make better decisions, control spending and keep the business financially healthy.
A budget only becomes useful when someone actually uses it. Business accountants can make sure that happens.
