Business Budgeting
Most business owners realise the importance of establishing and sticking to a yearly business budget. This is the best way to make sure business expenditures don’t exceed income during the month, forcing business owners to have to inject working capital or use credit lines in order to make ends meet. It’s critical that various department work together with other key members of the management team to create a business budget that defines the company’s basic financial structure and how cashflow will be managed to work within this structure. Business budgeting helps minimise the uncertainty that often accompanies expense and cash flow forecasting, providing the business owners a framework to work within and ensuring predetermined results.
Benefits of Budgeting
Taking the time to create a business budget may offer potential benefits to your company:
1. You can predict when cash shortfalls may occur, allowing you to make plans for financing or even a cost cutting exercise if deemed necessary
2. In the event of large capital expenditure, it is important that we ensure that we have enough to make necessary installments and financial commitments.
3. You can reduce interest expense by planning financing needs well in advance.
4. You have ample cash flow for rainy days
5. A well communicated budget helps everyone understand the priorities of the business.
6. The process of creating a budget provides opportunities to involve staff, resulting in them sharing the organisation’s vision.
Case Study
In the early 2010s there was a prominent bakery located in the heart of the CBD here is Singapore. Sophie Bakery International was inspired by the traditional and classic French bakery along the streets of Paris. It expanded it stores rapidly and at it’s largest had over 5 bakeries in Singapore. All the bakeries were either in the CBD or out skirts of the CBD.
During the final chapters of their business lifecycle, They engaged Kingston Alliance Group (KAG) to restructure the business. Despite it’s rosy façade, a deep dive into their books and operations uncovered massive lack of financial controls and mismanagement on all levels and department. The outlets were overstaffed, Some employees were overpaid, they were unable to pay their suppliers on time and most importantly, their revenue could never keep up with their expansion and cost incurred.
Our consultants started with the management restructuring process by streamlining the entire company’s operation headcount. We release duplicate headcount and have staffs running on skeleton manning hiring only part timers to stand in during the peak hours. The admin office rental was renegotiated and half of the office space was sublet out to lower the burden on the cash flow. We understood the importance of branding and the quality of food should never be compromised. Our consultants studied the inventory and had the chef used existing food products that they had in the warehouse to come up with lunch specials such as lobster sandwich and run promotions such as pastries of the day. Our consultants further help improved the cash flow situation by claiming grants such as EDG, PSG and PIC.
We further engaged an external CA to run through their books and brought the books up to date only to realise the business was making losses through since inception. This explains how the business managed to burn through over US$3m in working capital over the last 3 years. Despite making losses, they have been aggressively expanding their business.
This could all be prevented if the management had proper cost controls in placed or even hired a qualified financial controller to ensure that cost incurred was always within the healthy ratios to revenue earned.
Sadly for Sophie Bakery, they closed all their bakeries overnight in 2014. At the time of closure, money was still owing to suppliers and unpaid taxes was due to the IRAS and employee’s salary was a few months behind schedule. KAG helped reduced the debt owing to government agencies for the unpaid GST and salary and even paid over $10k in outstanding salary form our own consultancy fees to ensure all workers were paid their final salary.
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