Budgeting to set up for success in 2018
As we approach the end of the year (where does the time go?!) it’s a great time to start planning your business budget ready for the next one. Setting up a budgeting process allows you to keep an eye on your finances, set your annual objectives and understand your current and future financial commitments – all essentials for any SME.
A solid budgeting plan will also help you to manage and allocate funds appropriately and avoid any potential cash flow or financial issues, so you can proceed into the New Year with confidence. It also gives you a benchmark to measure your performance, helps you ‘test’ different scenarios and gives you the capacity to create a financial action plan to keep things on track.
The first step...
Business planning and budgeting starts with understanding your current position, so the first step is to collate all the data you can in terms of:
Sales projections for the coming year
Working capital – what does a typical cycle look like for you?
The costs associated with these sales e.g. materials and subcontractor fees
Fixed business overheads e.g. premises, staffing costs, utilities, equipment, travel, business development, insurance etc.
Variable costs – such as overtime
Seasonal fluctuations in income/expenditure
Any other liabilities
You can use your previous year’s figures as a guide, and also look at any trends in growth/reductions to help you make accurate estimates of what to expect in the next 12 months.
At this stage, it’s worth looking at any costs that could be reduced, such as finding a better deal for your telephony, gas and electricity or outsourced services.
Define your business goals
Now that you have your projected and set figures, you need to lay out your objectives and goals. Where would you like to be this time next year? Do you need to find/free up cash for essential investments that will take your business to the next level? Do you want to become more competitive, or increase your profit margin? Do you want to see higher revenue or more actual cash in bank?
It might also be worth testing a really ambitious goal – often called a BHAG (big hairy audacious goal) – as this can set your sights a lot higher than they might otherwise be. What would you need to achieve it? This is where you can use the planning process to test out different scenarios of what might or could happen.
Planning for growth
The next thing to do is to look at whether any additional expenses are likely to arise throughout the course of the next year – and distinguish between those that are needed, and those that are desired. This enables you to manage your finances to ensure you can cover expenses that are integral to your continued operation and see where you can reallocate or divert funds to cover other potential costs that could bring your business tangible benefits.
For example, you might foresee the need to expand your production line, take on new staff to cater for a growing client base, or invest in new business equipment, technology or machinery.
You may also want to increase your fleet of liveried vehicles or get a new website designed – but these types of things may fall into the ‘desired’ category rather than the essentials.
Every growth or development initiative you want to implement will come with their own associated costs – so consider each and every aspect and, where possible, get quotes for them so you can see just how feasible they are, or how much money you’ll need to allocate to these activities.
Once you have all the figures and have considered your requirements for the next year, you need to set up a plan to put everything into action.
Who will take responsibility for the different elements? When do you want to implement them? Do you have quieter periods where you have more internal resources to draw on, without affecting output and productivity? By looking ahead and using previous experience, you can work out how to best manage the various elements of your budgeting plan.
Once you’re in the New Year, it’s important to regularly review your budgeting and business plan. Regularly compare your budget with your actual financial activity – this helps you to modify and adjust your plan if needed, and make increasingly accurate projections based on real ongoing figures but perhaps even more importantly it allows you to celebrate successes as you go through the year.
The more in-depth your budget, the better prepared you’ll be for making any unforeseen financial decisions, as well as managing the more day-to-day activities. This is just a very brief snippet to guide you through your planning and budgeting essentials, but if you require further advice or professional support and don’t have the right personnel in-house, then it might be worth calling in a financial manager to help.