Over the years, I've had many business owners look at me blankly when I ask this, so perhaps I should explain what I mean by it.
A forecast budget is a record of all expected financial activity within a business over a set period, usually a year. Broken down by month, it's an invaluable tool for the management of cash flow and monitoring of business health.
What sort of information goes into a forecast budget? Everything. From sales to staff costs, heat and light to bags and wrapping, subscriptions to shrinkage, and everything in between. If it enters or leaves the business, include it. Although putting together the first one can be challenging, getting it right makes the construction of subsequent forecast budgets much quicker and easier.
I created my first forecast budget in 1990, and it took me three days to put together. By the time I made sure I had covered everything and phased it correctly, I was going a little stir crazy, but I also had a document which gave an accurate plan of what was expected to come into the business and what was going to leave it - and when. Keep in mind that this was pre-computers, so everything was done manually. Everything! Today, that same budget could be put together in a fraction of the time.
There are a few things to consider when planning you first forecast budget:
- Phasing There's no point spreading the cost of insurance evenly across the year if it's charged quarterly, for example. Allocate the cost to the period you expect it;
- Be realistic Overestimate your sales, for example, and you may allocate unsustainable expenditure. Underestimate and you may not allow sufficient expenditure. It's rare to be 100% accurate, but you can be realistic based on historical information and current trends;
- Watch your weeks Financially speaking, some months have four weeks, whilst others have five. This becomes critical when factoring in income or costs which occur on a weekly basis, such as staff costs;
- GST Either include it, or don't. But don't include it on some lines and not others; that way madness lies. Ideally, don't include it.
At this stage you might be wondering if it's worth all the bother. After all, that's what accountants are for. Rest assured, it will be one of the most valuable tools you'll create:
- It will give you a much better understanding - and control - of your business;
- You will be able to pick up on discrepancies or cost blowouts quickly, allowing you to address them in a timely manner;
- You can respond to changes in circumstance in a timely manner;
- You know what invoices are coming through and when, and can manage your cash flow accordingly - there should be no nasty surprises.
The point about picking up on discrepancies is particularly pertinent. I've worked with many businesses which received only one detailed assessment each year, usually several months after the end of the financial year, invariably done for tax purposes. This may be completely adequate, if adequate is enough to drive your business. However, in too many instances these assessments showed a business deep in debt. In some cases, a plan could be implemented to help the business recover. Unfortunately, in others the problem had compounded to such an extent that recovery was next to impossible. Frustratingly, too often these businesses could have prevented the situation from becoming serious by picking up on it more quickly. So often, it's easy to fix an issue and prevent it from recurring in the early stages.
If this sounds rather bleak, it's only partially intentional. The reality is that a successful business doesn't just happen, someone takes control of it and makes sure it's running smoothly and to plan. The financial health of your business is in your hands, but it doesn't just happen, it requires planning and effort.
Which brings me back to the title of this post: no-one else is going to care about your business as much as you do. If you're not monitoring its financial health and responding to what you find in a timely manner, no-one else is going to do it for you.
