In these difficult times more than ever it is essential to have your finger on the pulse and know how your business is performing right now. Having a well-considered and well-prepared budget and monitoring actual performance on a monthly basis to that budget is one of the best ways to ensure a swift and managed recovery. 

Business Forecasts and Budgets – Why do I need them?

Advivo’s guide to Business Forecasts and Budgets.

Here at Advivo Accountants and Business Advisors, we’re always preaching about the importance of having a functional business forecast or budget.  “Why do I need a business forecast” I hear you ask?  The short answer is “because you can’t afford not to”.

Everyone has heard the phrase “you can’t change what you don’t measure” and it’s true!  This is because without that baseline measurement, you’ve got nothing to compare results to.  What’s more, if you’re trying to measure the outcome of certain decisions, whether they be marketing, staffing, or general business strategies, you have no way of knowing what’s working or what’s not unless you have a baseline against which to measure results.  Your business forecast gives you that baseline.

Why else are business forecasts and budgets important?

I’ve already briefly touched on the importance of measurement and below are just a few of the many additional reasons why business forecasts and budgets are important.

  • Banks – Banks will often request forecasts when assessing a business’ suitability for finance
  • Goalsetting – Setting goals and targets for your business and team;
  • Morale – Those within organisations should know they’re part of something bigger and visibility on organisational goals and targets (which come from forecasts) help set team and individual targets keeping everyone’s head in the game, working towards your common goals;
  • Business Improvement – Forecasts help owners understand where things went wrong (i.e. ask the question as to why you were over/under budget);
  • Growth – Even if you’re comfortable with the size of your business, these days if you’re not going forwards, you’re going backwards, so it’s important to continuously be planning for a certain level of growth within your business.

A Business Forecast or Budget can be simple.

A business forecast or budget doesn’t necessarily need to be complicated.  In some circumstances it may be appropriate to just take your previous year’s result, increase the top line by a growth percentage, and call it done!  Whilst this isn’t exactly a ‘detailed’ forecast, it will give you something to aim for over the next 12 months.

Just a little more detail goes a long way.

It’s really only smaller businesses such as sole operators who can get away with a forecast or budget being as simple as that described above.  As your business increases in size, so too do its requirements.  Most forecasts should therefore at least have their cost of goods sold (COGS) moving appropriately with their sales.  You can work out your COGS as a percentage of sales based on your historical figures, then use that percentage to estimate what your COGS will need to be in order to reach your forecast (or budget) level of sales.

Take this a step further again to add in your overheads (being all your fixed costs, like rent, insurance, outgoings etc.) and you’ll end up having forecasted your net profit as well.  This then lets you know what’s left after tax etc. so you can plan for that holiday (run with the excitement… it’s free!).  Importantly, just as you get excited about seeing possible results, so too will your staff, so you’ll actually be more likely to achieve those targets just by having your staff aware of them.

A Business Forecast is not just a number…

Whilst most overheads will be fixed to an extent, there will come a time when your business needs to add to its overheads  to be able to deliver the level of sales forecasted.  This is when your forecast really comes into its own.

When businesses have growth plans, I recommend making sure your forecast/budget isn’t just a static document, but more of a financial model which can be used to forecast not only your expected profit, but also your balance sheet and most importantly your cash flow!  This lets you clearly identify timing of when you’ll need additional resources to facilitate your business’ growth.

‘Resources’ required could include staffing (which will increase employment costs), a larger business premises (which will increase rent and outgoings) and so on.  Most importantly, cash is a resource which you need to plan for.  This type of budget is typically referred to as a Three Way Forecast and we’re finding more and more financial institutions are requesting such forecasts so as to determine a business’s capacity to borrow funds.

A Step further again:

Just as many lenders are now requiring Three Way Forecasts to assist in their decision-making, business owners can take their own forecasts a step further, turning them into fully functioning financial models.  This allows you to run ‘What-if’ scenarios on your business because you’ll be able to model the impact of business decisions to help you assess their pros and cons, along with any associated cash flow implications.  Cash is king, and many good businesses have failed due to poor cash flow.  A fully functioning financial model allows you to forecast the cash position for your business, meaning you can step in and address any problems before they become an issue, and you can forecast for realistic goals, with a proper understanding of the resources required to achieve them.

This is why we offer our own version of this report to our clients known as ‘The Future Fitness 3-Way Report™’ which enables us to efficiently and systematically provide financial insight into our clients business, its viability, the viability of your future aspirations in changing times and circumstances, or for a specific project. The Future Fitness 3-Way Report™ assists with raising debt from your bank or equity from the market, an even more difficult task at present which means you need to approach the task professionally and be fully prepared. The insights uncovered by 3-way reporting helps our clients influence and drive the strategic direction of their business and identify and mitigate risk as well as providing an ongoing monitoring mechanism that enables them to pivot if necessary.

Horses for courses

This is why shortly before the Coronavirus Pandemic hit the world, we at Advivo Accountants and Business Advisors completely re-engineered the way we’re able to work with businesses to deliver a better service for their ongoing goals and needs. We understand business owners crave all the benefits of having an accountant who is completely across their numbers, and also able to be a sounding board, sharing their own knowledge and experience helping business owners overcome challenges and achieve their goals sooner.  We also understand that whilst this is what business owners crave, most don’t want the price-tag which would normally come with it from traditional accountants.

Written by Leon Stephan

 

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For more information or for an obligation-free chat as to how our Monthly Service Program (MSP) will help you, please click here or contact us today at 07 3226 1800 or email us at info@advivo.com.au for more details.