Fast Forward your Business – Life After Lockdown.
No matter whether you are a small startup or a large corporation. When it comes to managing your business, understanding how to effectively budget and to manage your cash flow is crucial. These management tools are essential in ensuring that you can make informed decisions and make more accurate plans for the future.
Managing your budget and cash flow is always important. And it is more important post lockdowns than ever before. Why? Because historical cash flow information is skewed by the effects of the pandemic on your business. For some businesses, income increased as sales moved online.
For other businesses, for example, those in the hospitality service sector, income was adversely affected or supplemented by government grants.
Utilising budgeting tools will help provide you with a clear guide on performing your business. It will also ensure you can identify any issues before they become major problems. An effective budget and cash flow forecast can also act as a measurement to compare your growth and performance, and it will help to keep you on track with your goals.
If you require additional finance, these tools can also showcase your capacity to lenders, allowing them to see your potential.
Below we break down what budget and cash flow forecasting are and how you can use them in your business to improve overall business outcomes.
What is a budget?
A budget is usually an annual forecast of your business, based on your history and assumptions on the future. This forecast will then act as a benchmark to compare your performance over the coming 12 months. While an annual budget is most common, this is not a hard and fast rule. Many companies utilise monthly or quarterly alternatives, depending on their needs.
An accurate budget allows you to set realistic goals and plans for the future, ensuring you always make the most informed decisions. When you know exactly how your business is operating, it will also help you allocate funds better.
When it comes to creating a budget or altering your existing budget, we recommend that you consider these key factors as a starting point:
One of the most important factors is your income. Your income will cover most expenses. But the income might not be enough for startups or businesses that face unexpected costs due to the multiple lockdowns. Regardless, adequate funding needs to be in place.
To develop an accurate budget, you will need to know when your income will be received and the overall values.
Fixed costs are often some of the biggest operational expenses of a business and are a vital aspect of budgeting. These costs can include wages, insurance, rent and utility bills, to name a few.
Alongside your fixed costs, you will also need to consider variable costs. These include marketing budgets, utility bills, expenses, repairs, memberships, licences and cost of materials. When calculating your variable costs, you should try to ascertain when they will occur and a rough guide on how much they will be.
When creating your budget, you will also need to understand your net profit. Net profit will be the expected income minus the expected yearly expenses from your fixed and variable costs.
Once you have ascertained your figures and predicted profits, it is important to analyse your data. You will need to compare your actual income and expenses against your expectations, and this will allow you to track your overall performance and make amendments.
What is cash flow forecasting?
A cash flow forecasting allows businesses to understand the requirements of their organisation and the cash that will be required throughout the year.
Even profitable businesses can struggle and come into problems due to insufficient cash to cover expenses when they are due (known as being insolvent). This is why a cash flow forecast is crucial in ensuring that you can accurately monitor your requirements, the expected timings of your payments and the income your business is receiving.
Typically, a cash flow forecast will cover 12 months, and however, many businesses like to focus on a longer forecast over several years. This can be an important requirement in strategic planning and purchasing capital investments such as equipment and property.
Cash flow forecast
The forecast is designed to ensure that you will always know the status of your organisation’s cash position. This will allow you to make more informed decisions. Understanding your cash requirements will also safeguard you from facing any shortages or surprises. I
t will ensure you always have sufficient working capital throughout the year.
While a cash flow forecast might seem a complex process, it does not need to be, and it is not a frigid forecast. It can be amended throughout the period as your business circumstances change.
To correctly calculate a cash flow forecast, you will need to look at the cash inflow your business receives and the outflow you must pay. This will be based on previous years for existing businesses, and while for startups, it will need to be based on your expectations for the coming period.
When creating your forecast, you must prepare for variations or unexpected challenges you might face alongside the inflow and outflow. This will ensure that you are always ready for the future and that your business is not facing a surplus or shortage of cash. An efficient cash flow forecast will help you be prepared, and it will also help you allocate your funds better and expand your business.
Need help creating a budget and cash flow forecast?
There can be no denying that budgeting and forecasting your cash flow are essential to any business. However, it can be tough to find the time to put these together in the hustle and bustle of modern life. Plus, it is difficult to predict the long-term impacts of the pandemic on your business’s future.
Here at Ingrams Accounting, our highly experienced team is on hand to help you. We’ve been working with businesses across Australia since 1938, helping organisations with all of their accounting needs.
We pride ourselves on our comprehensive and friendly approach, so if you want to find out how we can help you, contact our friendly team at Ingrams Accounting in South Yarra.
This information is general and has been prepared without considering your objectives, personal or business circumstances, financial situation, or needs. Because of this, you should, before acting on this information, consider in consultation with your adviser its appropriateness, having regard to your objectives, personal or business circumstances, financial situation and needs.