New Year, New You - Financially speaking

Budgeting

  

It is that time of the year when we start thinking about being better. As a small business this should be especially true. Asking if you could be making savings or how you are going to improve cashflow, your goals can be a struggle in the current economy. In the next couple of weeks, we will be releasing a number of articles to assist you in your financial journey.


Our first topic is budgeting and how some small changes can be powerful.


  1. Be clear about why you are budgeting, don’t just spend hours working on something to pop in the drawer and forget about. Instead, use it as an opportunity to create a roadmap for the following year(s) that you can compare your actual performance against.
  2. Use past performance to assist but understand that it has limitations. Past performance will allow you to find a base level of costs that you can adjust up or down. It will also allow you to identify trends such as seasonal variations of income and costs. It will not, however, provide the best measure of future performance, it cannot be taken in isolation. Ensure that past inefficiencies do not become the norm by just accepting what happened in a prior year. Question everything.
  3. Do not expect to have perfect information. A budget is a best estimate and it will never be 100% accurate. However, it can provide a good baseline measurement of performance to work against and highlight areas for further investigation/questioning. 
  4. Be realistic, it can be easy to create a budget that shows what we want to see rather than one that is reasonable. Do not get sucked into overestimating your revenue and underestimating your costs just so your budget looks good. It must reflect reality as much as possible. It will assist with emotional stress later on, as you won’t be worrying why your performance is falling short of your budget.
  5. Cash is King – or is it? The P&L is not the be all and end of all. Go a step further and create a cashflow forecast that is derived from the budget P&L as it will show you the impact on cash flow of a number of factors such as:

  • Payment terms to both suppliers and customers;
  • Non P&L payments such as loans, leases and Capex;
  • It will adjust for non-cash items in the P&L such as depreciation of capital purchases where the cash left the business in a previous financial year.


We hope that these provide you with food for thought. We will be expanding on some of these themes in the next couple of weeks and providing more detail to consider.


If you would like to discuss anything in this article or are interested in speaking to someone at Cariad Consulting regarding our services, then please contact us here.

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