INTRODUCTION:
If we're serious about getting our business planning right, it's extremely important that we do our forecasts accurately when it comes to cash flows, profit and loss and balance sheet. So how should we or our accountants and business advisors go about doing this to get us the best possible results?
Figure 1: Failing to budget properly can lead to disastrous consequences
If you really want to get down to business and make sure you haven't missed something, 3 way budgets are definitely the way to go. These simply are budgets that project cash flow, profit and loss and balance sheet positions. The great thing about these is the fact that they all 'talk' to each other which enhances their accuracy. Based on assumptions about invoice collecting, sales, margins, expenses, timing of payments, inventory turnover and loan repayments, these tools are incredibly powerful when tryong to understand where did your profit go in terms of the bank. This is why banks love them as they can be more sure that you have got these projections right and will be able to comfortably afford the loan repayments.
Like they say, if you're going to do something at all you may as well do it properly. Any sort of budget that is roughed up without thought is going to be unreliable. Spend the time to get the income and expenses right, remember loan repayments and dividends/drawings in your cash flow forecasts. Analyse how long it takes to get paid and when your supplier payments are due. Understand your inventory turnover days and finally make sure your budget reflects what your business plan expects to achieve.
Make sure you get your accountants or business advisors to go over your numbers. They can assist with things like tax payments, GST etc.
Using them as a sounding board will give you confidence you are on the right track.
Figure 2: Tackling budgets head on can be a handful but worth it for best results
By changing certain drivers such as debtor days, supplier days, gross profit margins, inventory days, sales, expenses you can see the difference it will make to your cash flow. Once you worked out the best model that you are comfortable with and happy with, list down the actions required with a timeline that will help you reach the desired key performance indicator levels.
For example, look at debtor days and see if you can drop them by 5 days how much money this would create in the bank. Then consult your business advisor to work out what you need to do to make this happen.
Using the model to work out what you need to achieve to make your business valuation Sydney higher is also a great way to improve your business. If you want to sell your business down the track for x amount, then you need to work backwards by projecting what you need to achieve bottom line wise.
It's no good having a target if things change dramatically during the year which makes the projections unworkable. This might cause you to ask "Well what's the point of doing a projection then?".
The answer is that if you hadn't planned to make change for the better, when things do change in the business environment, you will at least have been in a better position through your business improvement actions. This meansyou will be much better equipped ithan if you hadn't done any business planning prior.
When you play a game of football, the coach will give you a game plan but things happen along the way. The plan might have you 5 ahead at half time but an injury to your key means that now in order to reach your objective of winning you will need to adjust your plan.
We do this when we play sport so to give yourself a chance of winning the game of business, get your plans ready and be willing to adapt along the way.
CONCLUSION:
Well I hoped this post has helped you understand how you should approach budgeting when it comes to business planning. Without a proper budget process, it's like trying to create a pizza without the cheese. It's absolutely critical to achieving your end game.