As a business owner, it is important to ensure you have a budget in place to manage expenses and plan for the future and even more critically in the current ever-changing environment. A carefully constructed budget allows you to continually track the financial progress of your business, allowing you to strategically plan for the long term.
Having a clear budget and business plan will enable you to manage cash flow, allocate and utilize resources appropriately, and take measured and calculative steps towards new investments.
Why do you need a budget?Every business should have a documented budget in place to ensure that you are making sound financial decisions, comparing your current financial position and planning in order to achieve your financial goals. A budget can help to identify areas where expenditure needs to be brought under control, or where there is scope for further revenue increases, in turn increasing the profitability of the business.
A budget will also be critical when applying for a business loan or raising funds from investors, as this provides a clear roadmap and can help to prove the ability of the business to repay the loans.
When should you do it? A full 12 month budget should be completed every year, setting out a month by month forecast for the following 12 months. You can then complete a mid-year review, or ideally review this on a monthly or quarterly basis with your management accounts. This ensures that you can act quickly and decisively when required to bring the business back in line with your budget.
What should it include? Revenue projection - You must have a clear month by month revenue forecast, that all the sales team have bought into and agreed. There are a number of different ways of forecasting the revenue for the year, depending on your business model and industry. The important point is that there is a clear plan and calculation behind the revenue target – with measurable KPI’s and clear expectations from the team.
Improving gross profit margin – In the current volatile climate, Gross profit margin can make or break your financial plan. It is important to make sure you know how your gross profit margins are being impacted by rising cost prices, and can clearly forecast sales price increases in order to maintain the profit levels required. Again, it will require measurable KPI’s to be set and tracked throughout the year so that Gross profit margin remains on track and price increases are passed on to customers.
Planning a 12-month cash flow projection – Flowing out of your financial plan, you should arrive at a month by month 3-way forecast (Profit and Loss, Balance Sheet and Cash flow). Once you have this baseline forecast, you can then explore scenarios and ‘stress test’ your financial plan. How soon could we pay down the debt in our business? What will happen if we lose our top customer? How much can we afford to increase our stockholding by? This forecast should then be kept as up to date as possible throughout the year so that you always have a forward view of your cashflow.
Having a contingency plan in place – As we have seen first hand over the last few years, unforeseen circumstances always happen. This is why it is important to develop an emergency plan, allocate emergency funds and create strategies to mitigate risks. By developing a contingency plan your business can react quicker and smarter to unexpected events.
Once you have set out your financial goals for 2023, you need to map out your plan to achieving these goals. The more details you can map out the better you will be able to tell whether your goals are realistic and how to reach them. feel free to contact one of our team via info@oldfieldadvisory.com or call 02476673160 if you would like assistance with bugeting or financial planning.
Please note: This article is provided for information only and was correct as at time of writing (09/12/22). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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