Tag Archives: budgeting

What’s the forecast

I have a new toy! For the past couple of weeks I have been experimenting with a software program called foreCASH, a tool for creating business budgets and forecasts.

There are lots of different programs that do this, but what’s special about foreCASH is that it is designed specifically to give really useful cashflow forecasts – and as the saying goes…Cash is king

Not everyone is convinced about the usefulness of having a forecast though. I sometimes hear the argument that forecasting doesn’t help as it won’t stop a major disaster from derailing progress.

That is a very negative way of looking at life! Basically saying that “what will be will be”; that you have no control over whether this year is a good one or a bad one.

It’s true that forecasting is most effective when the business environment is relatively stable and predictable, but that’s not a reason to trust your business, your investment of time and money, to fate!

My top reasons for forecasting are:

1. How much is enough?
A forecast gives you a way of judging the outcome of your hard work: a way of seeing how much sales you need to make to generate enough cash to pay all the bills (including your own wages). Can you reach your goals with the business model that you already have, or do you need to make a more strategic change?

2. Green Light/ Red Flag
It gives you an early warning system for detecting whether you are on track for meeting your targets or not and it gives you more information about why things are not going to plan. This needn’t necessarily be bad news – things could be better that you planned, in which case you need to understand why.

3. Profit isn’t enough!
Cash is KingYou need cold, hard cash to pay the bills. So you need to know where the cash if going in your business.

Nowadays most businesses have some combination of loan repayments and finance contracts to pay monthly and these aren’t taken into consideration in a Profit and Loss report.

Add to that the joy of paying tax on your profits much later than you made the sale that the profit arose on and your cashflow will be a very complicated beast indeed!

(Personally I find that it is the deposit for finance for new investment that is a cash flow killer, the monthly repayments are much more manageable.)

4. The past is not a good indicator of the future.
If things worked out well last year it doesn’t mean this year will be plain sailing. In fact it most likely means that this year needs to be even better!

In the UK all small businesses will shortly be commencing auto-enrolment pension schemes, which will increase the cost of employing people. And there will be other changes as well – some input prices may go up, the split of sales between different products/ customers may change.

Making a forecast will help you decifer how you think these changes will affect your business – it’s not just about sales increasing year on year.

What's the business forecast?Forecasts are all about control. You can’t control the world around you, your competitors or your customers, but armed with a forecast you can control the way you respond to the challenges that they present.

Success by chance is great, but repeated planned success is so much better.

My own Management Accounts

Just recently I have been working on my own Management Accounts.

At this point I have a confession to make – I spend much more time worrying about my clients’ businesses than my own. Just like a cobbler’s child (who never has serviceable footwear), my own Management Accounts are always the lowest priority. To be fair, I do have a much less complicated business than any of my clients but that’s no excuse.

However, I decided this year I should get myself organised well in advance of the final deadline in January and so I have completed my own business accounts.

Time to crunch the numbers...

Time to crunch the numbers…

My year started in April 2013. I had a really quiet start to the year, which was great timing because it made having time off over the summer quite easy to organise, but since September I have been working 4 days per week instead of 3 and I have been pretty busy.

I was surprised to see that my total revenue for last year was slightly higher than in the previous year. On closer inspection I can see that the reason I was surprised is that my “take home” profit was slightly lower than the previous year – in short I spent more on business expenses along the way. My revenue went up 6% but my expenses went up by 54%!Graph

I can explain this; in order to grow my business I am investing in it, but at the same time I need to control my costs in future. I don’t want my profit margin to drop again this year.

So I have taken a shot of my own advice. I’ve got my business plan (see earlier posts) so I know what I need to achieve this year and how I plan to achieve it.

Next I needed to set myself a quarterly allowance for how much I can spend. With my clients I look at monthly budgeting, but as my business is smaller quarterly is fine. This requires some work; things like travelling costs vary – more work typically results in more driving to see clients, but other costs like my CIMA registration and my insurance are fixed regardless of the amount of work I take on.

Travel expenses are going up

Travel expenses are going up!

Now that I have my budget written down I can see that if I hit my targets (and I will be working 5 days per week instead of 4) and control my costs I will be able to earn more even though my expenses are forecast to increase again. Controlling costs could be as simple as trying to spend as little as possible, but I don’t think that is a realistic option for a growing business – sometimes you need to invest in future possibilities.

From my budget I can also see roughly how much I need to set aside to pay my taxes, so I should be able to avoid any nasty surprises in the future.

I always think the biggest benefit of having a budget is that it allows one to see whether the early months’ trading is on target. If I set out thinking that everything will be rosy and can’t see if progress is good enough along the way I might be fooled into thinking things are great just because I’m busy.

With the benefit of a budget I can (and did) stop, look at the first quarter’s results and see if I’m on track or if I need to make some changes before its too late (FYI – things are OK, thanks for asking!).

I often find that when a business doesn’t make the profit that was expected the tendency is to blame a problem late in the year. However if you look at the figures in a little more detail it is usually clear that although there was a last Pound stackminute problem the poor results are due to consistently lower than expected margins throughout the year which left no room for manoeuvre.

With this in mind I am going to keep up to date with my own accounts throughout this year and fingers crossed I can keep to the plan.