Budgeting – Forecasting the Future with Confidence
As we head into April, most businesses are shifting their focus towards preparing budgets for the new financial year.
In doing so, many small business owners believe that if they’re trying to work out where they are going, they should take a long, hard look at where they’ve been.
And there is a lot of merit in this. Using the past few years’ of financial history will definitely provide you with everything you need to know about cash flow, revenue and profit.
But using these numbers to forecast the future is a bit like driving while looking into your rear-view mirror,” says Paul Rattray of ATB Partners.
“You need to look ahead, and around at the scenery too. Because all of this information is necessary to help you to understand the rhythm and cycle of your business.”
Budgeting is a good time for Business Planning
It’s not enough to just take the financial reports at face value – you need to look deeper and see the picture that the numbers are presenting,” Paul explains.
Some indicators you’ll be looking for are things like, understanding when it’s peak season for your business. Conversely, slow season, and how you are controlling costs over this time.
Do you have adequate staff for busy times? Too many people in slower periods?
Understanding the cash flow cycle unique to your particular business is critical.
“You must make sure you make allowances for the timing of both income and expenses,” says Paul. “Failing to make considerations for the gaps – which in some industries can be 60 days between financial outlay and income realised – can mean the difference between staying afloat and going under. Planning for, and managing these cash flow cycles, must be reflected in the budget.”
Budgeting Considerations
What about inventory? Has a product (or service) gone off the boil? Why? Can it be reinvigorated or is it yesterday’s news? How does that affect the sales pipeline and revenue?
What areas of your business are the most profitable? Can you expand these?
Where are you haemorrhaging cash? Do you know why? How can you fix it?
What about your suppliers? Are you happy with them? Is now a potential time for renegotiation? What are the implications of change?
“Budget setting for the new financial year offers you a great opportunity for two important things,” says Paul.
Firstly, it’s a chance to get deep and intimate with your business numbers – this tells you a lot about the overall financial health of your organisation.
“Software like Xero has made it easy for business owners to have this information at their fingertips, and most business owners are able to stay on top of numbers,” says Paul. “So the real opportunity while you have all that detailed financial information at hand is to revisit your strategic plan, and your risk management plan, to ensure you’re on track for planned growth, and that you’ve covered off anything that could thwart those plans.”
Review your Assets and Capital Reserves
“At this time, it’s also critical to review your assets, and capital reserves and the financial management strategies you have around these,” he says. “And don’t forget to plan for tax.”
“I’ve often said that money is the backbone of small business. And it’s not something I intend to dispute, but timing is also crucial. You can have the best idea, but if the timing is not right, it can pull you under.”
Managing the constant ebb and flow of money, resources and growth, in a harmonious balance is a necessity keep the business afloat and moving forward steadily.
Budgeting and Business Planning
“And there’s absolutely no doubt that it is incredibly tough for small business owners to find time for planning and forecasting, so we encourage our clients to take advantage of these natural inbuilt junctures throughout the year, which offer up a perfect chance for business assessment and review,” says Paul.
“Setting the new financial year budgets is one such point in time. It should be used not just for financial planning, but overall business planning too,” he says.
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