At MAP, we often talk with business owners about building a business that supports the lifestyle they want. It’s a core principle behind what we call a “lifestyle focused business” – where the emphasis is on extracting profit over time to fuel your personal aspirations, rather than solely building value for a future sale (which we refer to as a “capital focused business”).
But how do you actually do that? It all starts with a financial year budget.
Your Budget: More Than Just Numbers, It’s Your Personal Roadmap
Many people mistakenly think of a budget as a rigid, backward-looking document, or just a sales target. As Stuart and I discussed recently, it’s so much more.
A budget is about breaking down your financial year before it’s happened. It’s about deciding, ahead of time, what you want to say has happened from a P&L perspective when you look back in 12 months. It’s your benchmark for success.
Crucially, your budget should be something that would make you happy at the end of the year and drive you throughout it. It’s a balance of being ambitious enough to keep you energised, but realistic enough for you to achieve and celebrate. For some businesses, this might even mean budgeting to do less revenue than last year if the economic climate or client base has changed significantly. It’s about doing the “hard work” to define your benchmark, not just blindly comparing to last year or industry averages.
This planning tool forces you to uncover every area of the business. From new business opportunities and existing client habits to the macro environment, your team’s needs (salaries, bonuses, new hires), and even software subscriptions – everything gets scrutinised.
Budget vs. Forecast: A Dynamic Duo
So, if the budget is your target, what’s a forecast?
Your budget is your target, and it’s the most important one. However, we’re under no illusions – nobody hits their budget to the pound. Five minutes after you sign it off, something will likely change – a client signed, a client left, a cost spiralled.
This is where the forecast comes in: it’s your projection based on what you know today. The forecast’s starting point should be your budget. You take the foundational work of your budget and edit it based on real-time changes.
Think of it like this: your budget is your original roadmap – taking you from point A to point B. Your forecast is your Sat Nav, constantly updating the route based on traffic (unexpected client wins or losses, cost changes) and offering diversions if needed.
The beauty of a forecast is its proactive nature. When you’re constantly updating your forecast, you can see if you’re drifting off course before the month ends. This allows you to take action to close any gaps and de-risk the achievement of your budget. You can’t change what’s already happened historically, but you can influence what’s still to come.
The “Bottom-Up” Budget: Fueling Your Lifestyle Ambitions
One of the most powerful ways to create a lifestyle-focused budget is through a “bottom-up” approach, what I often call an “upside-down P&L”. This method ensures your business directly funds your personal goals.
Here’s the essence:
- Your Shareholder Reward: As an owner-operator, you wear two hats: shareholder and director. As a shareholder, you should expect a significant return for the risk of running a small limited company. What number would make you happy as a shareholder?
- Your Commensurate Salary: As a director, you deliver a role to the company. What would it cost to hire someone else to do what you do?
- Retained Profit: You shouldn’t drain your business every year. You need to retain some profits as a buffer, working capital, or safety net.
Combine these three figures, and you have the profit after tax that your company needs to deliver. From there, you work up to your revenue number, adding your operating costs (current and planned investments).
This approach is incredibly enlightening. Many clients discover that their “dream business” might require a revenue figure of, say, £2.3 million to give them everything they want, rather than an intimidating £5 million. It allows you to figure out how many clients you need, and even the staff required, based on your desired personal return.
It also often feels more predictable, as it’s easier to forecast your costs (like team salaries and fixed overheads) than future sales in many cases.
Your Budget: A Tool for Control and Clarity
Even if your budget gets “ripped up” due to unforeseen circumstances like COVID, it’s a chance to reset. Your budget is your current intent, and it’s there to be challenged and changed when necessary. However, this doesn’t mean changing it daily – that defeats its purpose.
At MAP, we aim to do as much of the heavy lifting for you as possible. We’ll document your known costs and historical data. Your role is to provide the critical insights from your head and your business that we can’t see from transactions – like planned pay rises, team changes, or subscription cancellations.
We can’t set your targets for you, because they need to reflect your unique definition of success. Your business is unique, and your budget should reflect your age, profile, hobbies, interests, and ambitions.
Ultimately, your budget is a vital tool for ensuring your business delivers the lifestyle you truly want. If you’re a lifestyle-focused business owner, and you’re ready to create a budget that reflects your ambitions, reach out to your client accountant or local contact at MAP. We’re here to help you map out your financial journey to happiness.
Paul Barnes and Stuart Brown discussed this topic in detail and you can watch/listen to the recording here
