The importance of budgeting

The business was about to open.  The kitchen was fitted out, stock had been ordered and staff hired, but there was one ingredient missing.

Give your business the best start possible, and have a budget that you update and believe in.

Give your business the best start possible, and have a budget that you update and believe in.

It had been a hard three months getting the café open. Through their accountant they had easily borrowed a large amount and it was just as easily spent outfitting the café.

The failure to budget must be the leading cause of failure

I meet them because they had become eligible for a government grant to assist new businesses. To get this grant they had to show that the business plan and budget indicated they were viable. Surely I thought as they came in this was almost a formality. After all they had an accountant and had borrowed such a lot of money.

The café business concept is misleading simple. Deliver prepared meals to a table. To do this you need a good cook and hospitable front staff. And this we had in the couple.

But what they didn’t have was a formal business plan or even a budget.
They had borrowed everything and the loan repayments were short term. The house would be the security.

So for was most likely the first time, a budget was prepared. These budgets are not difficult or time consuming to do. The two biggest costs are food materials and staff. Even though they are too simple, the standard approach of 1/3 on food and 1/3 on staff is very well known.

The point of the budget is not just to establish the sales needed to breakeven. A far more important figure is calculated. What are the number of tables and seats that need to be occupied each day to breakeven? I have seen in the town previously bad examples of where there was a shortage of tables. This case was the worst. About 50% occupancy was required. That is every day, every sitting, wet or cold, in season or out season, one out over two tables needed to be occupied.

The problem stemmed from the high borrowings, high rental and the fact that menu had never been priced out.

This was a budget that needed to have been done months ahead. So why wasn’t it done?

I cannot answer that question, but a few weeks later the business opened. Being new it attracted bumper crowds and the 50% table occupancy was possibly achieved on some days. But as the heat died down, so did sales.

Within months it was failing to meet loan obligations, was missing rental instalments and cutting down staff hours. The end came with the business sold for a third of what they put into it.

I eventually did see the loss figures when new potential clients came in with the trading figures. Even though it was obvious that they shouldn’t buy it, I still managed to do a budget.