The Importance of Budgeting and Forecasting
Why is budgeting and forecasting essential for owner managed businesses?
Budgeting and forecasting is important to set targets for income and expenditure and then hold yourself accountable to those targets as the year progresses. The most financially stable businesses have a budget and a forecast.
The main benefits are:
- Identify risk areas early enough to rectify issues before they are serious
- Plan and predict cash flows
- Take control of what’s coming in and due to go out of the business
- Separate out a sub-budget for growth with confidence in how much you can spend
- Manage your sales pipeline and track performance against targets
- Make more confident strategic decisions
- Show potential investors
- Provide to lenders for funding
Your budget should be set before the financial year begins and should be fixed for at least a quarter before revising. Smaller businesses will revise the budget quarterly and larger ones will keep their annual budget fixed. The point of this is to give sales targets and limits for expenditure to keep you honest when spending money to grow the business.
Each month you should run a Budget Variance Report to show the actual results against the targets and discuss takeaways from the numbers. For example, one sales stream may be doing well but another may require more attention. It will help you identify areas of underperformance or overspend and rectify the issues before they grow.
Forecasts are the same as the budget at the start of the year but they are revised as things change. They flex and change throughout the year as your knowledge of the businesses position and pipeline changes. For example, imagine you win a big client, and then go and update the sales pipeline to show another £10k coming in each month for 12 months. You then update the cost associated with delivering that work (sub-contractors) and you now have an updated forecast. Your budget however will remain the same.
Business owners will struggle creating simplified templates that are easy to maintain, as well as establishing a budget in the first place. We have also found that whilst we all have the best intentions, monthly review of the budget variance report and revising the forecast do not happen often enough.
Businesses often have multiple systems for sales pipeline, expenses, accounting, forecasting and budgeting and none are talking to each other. Spending money on growth is haphazard, as businesses often cannot easily predict cash flow over the next few months or years.
This is where we can help! With our Aspiration and Virtual FD packages we take this hassle off your hands and help you produce a budget, provide you with a template for your forecast and setup, run and report on the results. This can even be run within your accounting software, once you have loaded your budget into the budget manager. Therefore if you are looking for a Xero Accountant in London or a QuickBooks Accountant in Birmingham then get in touch now for a free consultation!
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