Monitoring income and expenditure against business objectives

• Income Statement (refer to unit 3 above)
• Performance management: In financial management, we can refer to some indicators to assess the performance of our business. Comparing our budget/forecast to our actual results is one easy way of starting this assessment. Earlier in this module, we spoke about the advantages of creating a cashflow forecast. After a period of time (e.g. end of Q1 or after six months trading), it is useful to compare our cashflow forecast for that period of activity and compare it to the actual income and expenditure for the same period. Any large differences should be investigated. This is often referred to as ‘exception reporting’. 
• Controllable and non-controllable factors: While comparing actual results to the forecasted results, it is important to differentiate between the controllable and non-controllable factors. For example, the price of heating oil and gas has risen considerably in recent weeks. It is highly likely that a solopreneur would not have budgeted for this record-high price inflation. Therefore, we can describe it as a non-controllable cost. 

• A controllable cost might be the level of spending on advertising or the cost of dealing with faulty goods or complaints from customers regarding our goods or services. When we differentiate between what can and cannot be controlled, we have a greater sense of accountability and it will help the solopreneur take action over the items that they can control. It will also show where the business is exposed. If the non-controllable factors are researched, we may decide that they are temporary hindrances or perhaps a sign of greater insurmountable problems down the road for the business. 
• Flexed Budgets: One way to ensure that performance management is meaningful and useful is to ensure that we ‘flex’ our budgets to reflect changes in the environment. This means that our budget should be an organic document which can be tweaked and revised to reflect our current best estimates for the future.

EXAMPLES/CASES

A Sales Budget is often referred to as a ‘Master Budget’. It is often the starting point for a solopreneur. They will need some idea of how many units (products/services) they will sell and what provisions they need to put in place to allow this to happen.

• It is essential that the sales budget is accurate because many other budgets are based on it.
• There are a number of ways of forecasting sales, for example:

A) Market research of customer demand
B) Projecting future sales based on historical sales patterns
C) Sales projections
D) Seasonality of Sales
E) General Economic Conditions
D) Actions of Competitors
 

However, the solopreneur will need to ensure that

• There is not an overemphasis on short term budget targets which may lead to decisions which improve short term results but have negative long term implications.
• It does not focus purely on financial aspects as it may result in important qualitative factors being neglected. Consider the image of the business and how important quality is in the eyes of the consumer.
• Developing a longer-term focus on forecasting helps to avoid a ‘spend it or lose it’ approach – fear that expenditure below budget will negatively impact future allocations, encourages spending for the sake of spending.

TIPS

When preparing a budget, it is useful to know the industry averages. For example, if you are setting up your own café, you can find out what the average margin is for a cup of coffee.

You will often find these results after a quick search online, but it is also worth chatting to your accountant about it. They will know the average margin and ensure that you are not selling the product/service too far below or above this margin.

Some solopreneurs might decide to intentionally price their product above or below the average.

In some cases, consumers might perceive the product as better or more exclusive if the price is higher. Alternatively, the solopreneur might decide that they need to attract new customers with an introductory reduced price.

 Pricing is closely linked to the marketing and branding of the product and these elements should be considered carefully before finalising your sales budget.