By Kevin K.M Neoh
In the blink of an eye, 2020 will be here, a year many Malaysians have been waiting for.
Visions are set yearly to get people empowered and motivated to do their best to achieve a common goal. Getting closer to a shared vision requires careful planning, such as efficient management of financial resources through budgeting. Budgets are set yearly to help us focus and draws up tactical action plans.
In the Budget 2020, our finance minister has considered the government’s projected income from various income sources, and also reviewed the fixed operating expenses, before setting the key focal area of emphasis to allocate the income accordingly to each of the strategic area.
As a main driver or captain of your business or company, have you set a budget for your organisation or department? Budgeting is important not only to help us understand how to allocate our resources but also tells the employees the direction the company is heading towards. If a huge chunk of the budget is allocated for Research and Development, it will mean the firm is taking a proactive effort in introducing something innovative to the market which could change the whole market perspective.
If you are just starting out, or want to use budgeting as a strategic tool for the management of the business, you may adopt similar strategies used by our Finance Minister to set your company’s budget.
TALLY YOUR INCOME SOURCES
Not only must you know where your money comes from, but you must also be prudent, which means you must make certain assumptions and not to be too optimistic. Also, you may want to stress test your budget in a few scenarios, such as how would your budget be affected if income from certain sources are lower than your initial estimate. You can also spend some time to think about ways to optimise the income from each source.
DETERMINE YOUR FIXED COST
Review the cost that you cannot do away with, such as financing, rental or real estate cost among many. If you can find out how to streamline this, then it will help you to lower your fixed overheads.
What are the areas that need to be focused onfor t he next one to five years in your business plan? If you want to transform your business model, then heavier focus needs to be placed on the development of new products or business model. Alternatively, if you want to streamline your processes, or improve your customer relationship management, you may have to consider allocating resources that supports these objectives. You should also be mindful that some goals are long-term aspirations and require baby-steps or milestones, hence a roadmap is necessary to allocate your resources accordingly.
If it requires one-off expenses or acquisition of asset or properties, you may need to consider the incremental revenues and expenses which will be incurred after the cquisition.
As a business owner, it is important to understand the national budget and how it can be related to your company. For instance, if our country is pushing towards digital economy,
perhaps this is the right time for your firm to pivot towards that direction.
“PLAY” WITH THE PROJECTION
Constructing a budget helps you to understand the wealth and cashflow situation of your business. It’s not sufficient to have just an outline of where you want to spend money on. You need to avoid having negative cashflow situation as well. Hence, put all those numbers
into a spreadsheet and run some projection based on different scenarios. For instance, what if your estimated revenue falls short of your estimation by 20 percent?
What if some of your key account has unexpectedly delay making their payment to you?
It also helps to ascertain whether the assumptions made are too optimistic. It is alright to
be conservative, but if we are overly optimistic and something does not go according to anticipation, then things could be shaken up quite a bit. You can prepare a buffer-fund for your business to withstand any unexpected cashflow challenges.
DRAW A LINE BETWEEN PERSONAL AND BUSINESS
While your business may represent a large part of your legacy, your company is a separate legal entity. Therefore, for personal finance, we should do an honest annual review and projection of our income for the following year, and conduct an analysis of our expenditure, allocate some amount for your savings so that when the time comes you are prepared to achieve your life goals.
With some tax reliefs getting an ‘upgrade’ and tax deduction for donations being adjusted in the Budget 2020, all these will put extra money into your pockets, but if you do not have a ‘mission’ for this, then they could be subjected to mindless spending. So, set a budget, set an action plan for both your company and yourself, and start pursuing your life goal NOW!
Kevin K.M. Neoh is a Licensed Financial Planner at VKA Wealth Planners Sdn Bhd. He was awarded the Malaysian of Financial Planner of The Year Award (MFPYA) in 2016 and 2017. As a CFP Professional of FPAM, he holds a strong belief that families of all income levels should have access to professional financial planning assistance and that the financial world is too complex to shoulder alone.