What’s your four-year plan?
Feeling inspired about your own four-year action plan after watching the Federal Budget earlier this week? Here’s how to start.
Every year the government (and Treasury) crunch the numbers to see what areas need budget allocation – not just for the year ahead, but for the next four years.
Known as the ‘forward estimates’, this forecasting plots where funds go for four years. And a roadmap is born.
Forecasting out any longer means the roadmap risks being useless in the face of unexpected changes and headwinds.
So how do you create that forecast, map out an action plan while allowing for changing circumstances?
Creating the forecast
Forecasting is creating an estimate of your future expenses, profit and sales.
If you’re an existing business, forecasting will be a bit easier because you have some idea of your business cycles and have a good baseline on your numbers.
If you’re new, your forecast will need to factor in a growth curve.
An existing business may add 10 customers in a year to its existing customer base of 100 (a damn good year!), with revenue increasing by 10 percent. If you’re moving from one customer to ten, do the maths.
Expecting that growth rate to keep its momentum over four years is a touch fanciful, so take that into account when forecasting out.
Having a clear financial aim
When governments create budgets, it’s an action plan of what they want to do over the next four years.
They calculate the expense of all the programs and upgrades they want in various parts of the country. Then these aims are built into the expense (or revenue) forecast.
You can do the same.
If you want to chop into some of the debt on your books, that can be an additional expense line in your budget.
It’s about figuring out what your aims are for the next four years. Then your action plan moves you towards that aim. You can then see what your plan’s impact will have on your books.
So knowing what you want to do in the next four years and seeing its potential impact on your books will give you your roadmap.
Examining your underlying assumptions
The government just doesn’t set its budget every year and forget about it – it regularly updates its assumptions.
In the bedrock of every budget are underlying assumptions – things like company tax take, the price of iron ore, and how much PAYG Income tax is coming in.
All those things inform how much the government thinks it has to play with. Like how your business receipts from customers may underpin your revenue forecast.
In the middle of each year, the government creates a mid-year economic forecast outlook (MYEFO) where it takes a second look at all the numbers it used to underpin its budget.
There’s no reason why you can’t do the same.
If you see revenue falling against what you forecast, what can you do to increase your revenue?
Is there a way you can increase your average transaction by looking at your profit margins?
By checking in with a business advisor and looking at the numbers in your MYOB software, there’s no reason why you can’t take the same approach as the government each year and give your business a clear roadmap.