Having a financial plan can be one the most important functions for financial success. If you don’t have a financial plan of how your business will achieve success? A financial plan and budget will help you determine how much cash you have, how much you expect to spend, and how much you will need to bring in to ensure that you are meeting your business goals. Not only will it help you determine where you need to be, but often sitting down to actually create a budget will force you to examine your current situation, and identify unseen business insights, or risks before they sneak up and surprise you.
Setting a budget
There is no perfected method to forming a budget, depending on the business you’re in, the budgeting process and final budget might look very different. If your business is already in operation, one of the best resources for budgeting can be the historical information, which reiterates the important of accurate financial records. A good start might be to look at the revenues and expenses that your business is currently incurring. Are there any trends? What are the industry projections? Are you expecting to gain or lose any major customers?
Once you have determined your projected revenues you should be able to budget your cost of goods sold based on the cost of production/services. Consider if there will be increases in inputs such as materials or labour.
It is very important that you do not forget to consider other expenses. Be sure to be comprehensive, your budget should include all expenses: rent and other occupancy costs, administrative payroll and employment costs, interest on debt, income tax expenses. Which expenses you expect to continue? Are there expenses you expect to increase? Are there any expenses that you can cut?
If you are starting up a new business, you’ll obviously be forced to make more assumptions, but do your research. If you will need an office, find out how much that will cost per month. Research other local business. Are there similar products that you can use as a price point for determining revenues? Are there any specific expenses that you can observe that might provide additional insight into your costs? Use industry statistics as available, although no two businesses are the same, the environment they operate in might be identical. Research traffic patterns, perform customer surveys, do whatever you can to obtain as much information as possible.
Plans for growth
Upon setting an expected budget for the year, it is time to consider growth. This might be on an annual basis, but it might be over a much longer period. Regardless of the timeline, you should be considering your five year plan in the current budget. What capital expenditures might you have? Will you need to buy new equipment to facilitate the growth? Will you need any new computers, software, systems? Will you need to hire on additional staff? It is important that you plan for the costs related to growth or expansion. If you plan to grow revenue by 10% you should have a plan to ensure you will be able to finance and facilitate the growth.
Another important long term consideration is maintenance. Have you considered the costs of maintaining your current operation? Is there old machinery that will need to be replaced? Will you have the cash flows to purchase these assets? Have a plan for replacing key assets, at least the large ones, being crippled by the sudden loss of key equipment can sink a business very quickly.
Remember that despite you best estimate there will always be unforeseen circumstances. You should include some breathing room. Even though you may estimate that your business will maintain a certain growth, or that certain expenses may be contained or reduced, these numbers are not definite. Setting aside extra cash or being conservative in your estimates can save you when the unexpected occurs. Be careful not to be too aggressive with growth, be sure that you can maintain your business before you go buying new equipment, or hiring on new employees.
Reviewing budget throughout the year
Lastly, there is no point in setting a budget if just sits in a folder on your computer. Reference the budget throughout the year, communicate it to employees, and compare it to your actual results as often as possible. Although lots of large companies only set one budget a year, it may be very useful for you to revise your budget quarterly, or even monthly. As more facts present themselves, and your estimates turn to actuals, you may need to revise your strategy or goals for the year.