I was recently asked by a client: “I need to take out $20,000 from my business. Can I afford to do so?”
I thought it was an interesting question considering it is the client’s business and not mine. Even though we had spoken about how important budgeting and forecasting are to maintaining adequate cash flow and how necessary it is to constantly peruse financials, I could tell that the business owner had not adhered to my advice.
To them, it was my job as an accountant to advise when they could spend and take more money out of their business.
You have probably heard the saying “failure to plan is planning to fail,” and I believe this holds true, as I have seen this constantly. Businesses that fail to budget and forecast income and expenses will eventually hit a problem with the heart of their business — cash flow.
You must plan ahead with an eye on maintaining that cash flow stream.
Here are my top three tips to assist you in developing a yearly budget for your business.
Tip 1: Where to start?
Your business accounting software has a budgeting feature that you can access. It’s a simple tool to assist you in monitoring the business trading conditions throughout the year, and you can set budgets and performance targets.
Seek this out, as it will show your trading history per month of sales and expenses, and you will be able to enter forecast budget amounts per month using the previous years as a guide. If you are a MYOB user, you can do this easily.
Tip 2: Other tools
An Excel spreadsheet is an accessible, amazing, quick, and simple-to-use tool for budgeting. In your accounting software, there is a tool available to export data to an Excel spreadsheet.
It organises detailed yearly profit and loss statements that show expense and income accounts broken down month by month. You can then use this past trading history as a guide for predetermined budgeting for the year. As the year progresses you can review and adjust budgeted amounts to reflect the current trading conditions.
Tip 3: Review constantly
Budgeting assists you with predicting your business income and expenses. It can aid in making decisions for your business, but it requires constant reviewing and adjusting as the trading year progresses so you’ll have more information about actual results.
For example, budgeting will help identify which months are good earning months, which months are slow, and the months where there is a big cash flow drain (perhaps more expenses). You can identify problematic months and save cash to meet those demands or organise some funding.
By budgeting, you’ll also see if your marketing dollars are producing sales. You can also decide if you have enough money to hire new staff as business grows.
Any tool that can assist where to spend the cash and where savings can be made is vital information for any business. Budgeting is key — it assists in maintaining and boosting profitability. Remember that yesterday’s profit is today’s cash.