Budgets and Forecasting

When leading your business, you need to plan. Plan a strategy. Plan your spending, plan your growth. Up to now you will  have concentrated on

1.      building a bookkeeping system

2.      reviewing your numbers in the bookkeeping system

3.      now it is time to start putting in a process for planning and looking forward

We don’t have a crystal ball, however,  when we look to the future we want to have as much of the ‘known’ spending requirements accounted for as it take the anxiety out of the money side of the business.

Looking back

To understand where we are, we need to look back at the records we kept for last year, or last month. Whatever information we have we need to look at it and understand if this will be repeated or were they one off transactions. What can we learn from our past. Who are our customers are they going to buy again?

Looking forward

To put a budget together, you need to look forward and plan what is possible to achieve in the next month, 6 months, year. It is getting harder and harder to look too far into the future; however, you should be able to plan the next 3 months with some accuracy. You should always have a 12-month forecast and budget in place and review at least monthly.

Cash Forecast

I have mentioned a few times already how important cash is and I will say it again – Cash Is King- It’s THAT important.

To manage our cash circle, we need to have a cash forecast that we review on a daily/weekly/monthly basis.

It combines a couple of key budgets.

Sales Budget – what sales are we looking at for the next 6-12 months

Expense Budget – what expenses will we have to pay

Cash Budget – what money do we expect in and what money do we expect to pay out.

Download the template and follow the next few slides with it by your side.

In the example we revisit Cup Cakes Galore and we look at what Jo expects her business will look like over the next 12 months.

Money In

In this example we are looking ahead to 2020 and we are putting together a 12 month forecast (assume it is Oct 2019). It can be difficult to predict what sales we will do, we want to sell as much as possible yet remain realistic.

We can base our estimates on current sales trends and estimate that we will have a small % growth. We may know that the market we are dealing in is growing fast so we may assume a bigger % growth. Of we have had a lot of interest in our product and sales are booming therefore we are anticipating a bigger % growth. No matter what the rationale it is important to constantly review and update with relevant figures for your business.

Next we have the Cost of Sales section

Remember this is tied in with sales, if your sales increases your cost of sales will PROBABLY increase also. If they don’t and you understand why that is fine.

Expenses (Overheads)

It’s important that you capture all of your expenses here. Go through your expense sheet that you have already set up and decide if the charge is reoccurring or a one off. It may be that you have gone to few networking event during the year and are not sure if you will do this again, however, you are confident that you will do some form of networking in 2020 – put in a cost for it. It can be reviewed as cost come in, but it gives you a good guide

If you are thinking of buying items during the year it is good to do this.

Depreciation does not go into the Cash forecast because it is not a cash spend.

Down load the second Cash forecast example – I have included a bank balance at the bottom

Why do a Cash Forecast?

·        Identifies potential shortfalls in cash balances

Cash flow forecasting will help you identify if the business will run short on cash and when. It will help you decide what you really need for the business and what you can wait for.

·        Attention of customer payments

Keep cash coming in the door ensures the business will always have money to meet their obligations. Keeping a close eye on when customers are paying their invoices is key to this. It is too easy to put off chasing your debtors when you are busy. If your business is cash business this is less of an issue for you. However, often bigger orders will incur credit days.

·        Ensures a business can meet short and long term obligations

If you cannot pay your suppliers you will get into trouble (see week 2 on the cash circle) knowing how much you have coming in and how much you have going out is Key to a business’s success.

Tips on preparing a cash flow forecast

In business, things don’t always happen as they are planned and don’t always meet your initial expectations. Below are a few tips to remember when putting together a cash flow forecast.

Top Tips

Overestimate on Expenses

Underestimate on Cash in

Focus on timing