How are you driving your business? Are you only managing your business using the ‘Rear View Mirror'?

You would never drive only looking backwards…

Would you?

…Only if it was a straight road, with no traffic, and blue skies ahead. Even then, it would be dangerous and not recommended. But on any other road, doing that would almost certainly spell disaster.

It is the same in business. And while it may sound like common sense, it is amazing how many managers of businesses of all sizes are doing just that – reviewing their business financial performance, in particular, only looking backwards.

So, for small businesses how should they be reviewing business financial performance?

The simple answer is a small business owner needs to look both backwards and forwards.

But how do I look forward, you ask?

The answer is having a budget (or forecast) that allows you to estimate both what your future income (or sales) will be as well as your future expenses (or costs).

Using a budget (or forecast) helps with….

  • specifically understanding what income needs to be generated to break even

  • controlling your business finances to ensure you have enough money to cover expenses

  • managing those expenses that are not as essential, so that you can control them

  • staffing decisions

  • evaluating business performance, in fact, evaluating the outcomes from a particular strategy

  • and, most importantly, it helps you with the decision making process to effectively grow your business

The basic process for creating a budget is as follows:

  1. List all your expected income on a monthly basis.

  2. If you are just starting out, you may have to estimate these. But even doing this helps with understanding what the minimum income needs to be to break even.

  3. If you have historical information, then use this information, particularly seasonality, and predictions of the outcomes from any marketing strategies to estimate these

  4. List all your fixed expenses. These include your rent, utility bills and payroll. If you have historical information, then again use this information to have a more accurate prediction.

  5. List all your variable expenses. These are expenses whose amount may change depending on certain conditions, as well as non recurrent expenses

Hint: Be conservative.

In other words, make your income estimates on the low side and your expenses estimates on the high side.

More advanced businesses extend their budget to be more dynamic and have turned it into a ‘What If’ tool. That is to answer questions like ‘If I add a new cost (eg: an additional headcount) what will the impact be on the budget?’ or 'What would be the projected profit impact of such a change?'. This capability further supports the business owner with the decision making process to effectively grow their business.

I have significant experience working with businesses of all sizes supporting them in the development of their businesses. The majority if not all are managing their financial performance only looking backwards. The more successful use the best practice of using both their historical financial performance and their forward looking budget to effectively grow their businesses.

Rod is a business advisor providing smaller businesses with the necessary skills and processes to deliver their business improvement and turnaround initiatives in the role of advisor and delivery manager. In particular, based on 30 years advising and delivering large and small enterprises on technology projects, Rod has provided guidance and support to businesses on how to use technology to grow or to support the scaling of businesses. For more information refer to

19 views0 comments