In the excitement of growing your business, it can be easy to neglect the financial side. Many entrepreneurs are not excited by finance and accounting – they‘re more focused on what they do or make.
However, financial management is important to keep your business on target both to ensure it’s profitable and to avert a money crisis.
Cash flow forecasts and budgets provide two complementary and reasonably simple tools to help you make the right decisions.
A cash flow forecast is an attempt to predict in advance what your future business bank statements will look like. It aims to predict the:
The first part – predicting expenses – is easier than the second as most costs (business overheads such as rent, utilities, and communication costs) are relatively fixed or easy to research if you’re starting up.
Predicting sales is the difficult part – particularly if you’re starting a business and don’t have any previous sales data.
Cash flow forecasting skills generally improve with practice. The closer your predictions are to future bank statements, the better your money-management skills.
A cash flow forecast focuses on the timing of cash flows into your business. It can help you:
Cash forecasts and budgets deal with the same data in different ways. For example, if you pay accounting fees of $2,400 once a year, you would:
Similarly, if a customer pays you $120,000 upfront for project work, you would:
Your budget is an essential companion to your cash flow forecast. The difference is:
Most accounting software programs can easily generate monthly or yearly budgets based on your preferences. Once you’ve entered your desired budget amounts, the budget reports will display ‘actual’ against ‘budgeted’ figures as the year unfolds.
The actual figures in your budget report are an important way of keeping your cash flow forecast current and relevant.
Here are some of the main uses of a budget.
"Every business has some room to trim excess costs and especially cost increases not matched by any increase in sales or profits."
One of the most useful functions is tracking expenses. Every business has some room to trim excess costs and especially cost increases not matched by any increase in sales or profits. Budget reports can highlight costs that have increased or decreased, allowing you to take timely action.
Rising costs can be a useful prompt to shop around for new suppliers. The easiest path for a business is to stick with familiar suppliers, but an easy option can also become an expensive one. Calling for proposals or quotes for important supplies and services can reduce costs.
It’s useful to take the latest budget report into management meetings to discuss both variances in costs and also gaps between actual sales and budgeted sales. The budget provides no-argument, hard evidence if the business has fallen short of sales goals and this can focus everyone on finding solutions.
Many businesses have seasonal swings or ups and downs in revenue streams. The cash flow forecast should help you pinpoint times when you’re likely to have cash surpluses or cash deficits. You can then use your budget to:
Industry data can be useful when you’re setting your budget. For example, knowing what similar businesses spend on advertising (as a percentage of their sales) can be a useful guide when you’re planning your marketing.
This doesn’t mean that you have to follow the industry standard blindly − every business is different, but knowing what competitors are spending or achieving can sharpen your goals.
Budgets are a useful discipline for managing your business. Analyzing your performance through budget reports helps to make everyone aware that money is not an unlimited resource.
Money can be used wisely or it can be wasted. Costs need to be controlled and budgeted sales need to be achieved. All money resources need to be focused on getting the business to achieve its goals.
Finally, the purpose of cash flow forecasts and budgets is to help you make more informed decisions. They are only useful management tools if their figures are kept current.
Review and update them at least once a month, or more frequently if things are changing quickly.
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