In some respects, this is the most important of all. Loss making businesses can and do survive (although not indefinitely) but lack of cash is often the death knell. Even if you think you run a relatively straightforward and predictable business, there will be ebbs and flows in cash flow. These can happen at different times of the year – for instance your monthly salary payments, quarterly vat payments and annual tax bill. Preparing a cash flow budget allows you to identify these peaks and troughs and make allowances for them. If you run a seasonal business, perhaps you will identify that you need an overdraft facility to see you through the lean months whilst cash is tight. If you are investing in new equipment, you might see that you will need to borrow to fund it, as paying for it outright would make cash too tight.
Once you have prepared your budget, you can monitor your financial performance against it as you go through the year. You’ve then got a target or “landmark” to check how you are performing against plan. Comparing your actual against budget can provide an early warning alert, where things aren’t going quite right and allowing you to take action early on.
In the budgeting process, just as important as preparing the numbers is laying out your assumptions that they are based on. For instance, you might allow for an extra person, because you want to increase sales. When you come to compare actual against budget, you can then check why the numbers are different and not just what the difference is. Perhaps your salaries are higher than budget because you have recruited two new people rather than one, or overtime has been higher because of extra demand.
If you can now see why a budget may be valuable for you, book a day in your diary away from the day to day running of your business. Turn off your phone and give yourself some clear thinking time to write out your business goals.
Then take those goals and turn them into a financial plan (your budget). If you need help doing that, give us a call on 0131 220 0152 and we would be delighted to help.
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