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EVERY BUSINESS NEEDS A BUDGETCan you answer these critical business questions?
Outsourcing your business planning budget and cash flow forecasting reports could make sense as an alternative to messing around with spreadsheets, or taking valuable management time to install and learn dedicated forecasting software. A competent professional accountant has experience in business budget and forecast report packages for a wide variety of businesses, and should be very efficient at putting them together quickly and cheaply. You could expect reports prepared in bank-ready format, which means not only are you getting crucial management information, but also the vital information your bank is expecting to see is laid out in simple detail. The problems of forecasting with spreadsheetsIf you've tried a DIY budget, you'll know that it's harder than it looks. There's time spent formatting, and spreadsheets are notoriously prone to formula error.And then there's the technical challenge of accurately forecasting the critical balance sheet values (such as debtors, creditors, interest-bearing loans, assets). Banks particularly rely on this information, which requires a precise combination of arithmetic and timing factors, and can only be done reliably using dedicated software, or with specially constructed (and complicated) spreadsheets. Why bother?Business experience shows that almost no business will survive without some form of business budget and planning. Banks and investors recognise this, and insist on accurate cash flow and budget reports to support financing arrangements.The data collected from business failures shows time and again that poor planning and lack of funding are the major causes of business insolvency. "Luck" plays its part of course, but trusting that good fortune will take care of your money is not the safest strategy. A fully researched business budget and cash forecast can eliminate cash flow surprises and dramically lower the risk of business decisions. An example:Imagine a business "worth" $200,000.It has: $60,000 of receivables, and; $150,000 of inventory; and $10,000 in liabilities. The net value of this business appears to be: ($60,000 + $150,000 - $10,000) = $200,000 Is this business successful or not? Is it really worth $200,000? How can you tell? If the receivables are not collectible for a long time, and the inventory is unsalable - the business is bankrupt and would be hardly worth anything. On the other hand, if the receivables are all collectible within 2 weeks, and the inventory is easily sold at a profit, this is a very viable business, maybe worth more than $200,000. How much free cash is available (or required) for expansion, or dividends, can only be known by modelling the business carefully over several time periods. The Cash Conversion CycleWhat's critically important is your cash conversion cycle.Failure to fully appreciate the cash conversion cycle is why a good business, with good profits, can go broke for lack of cash. A simple cash forecast which ignores the balance sheet items can be quite misleading. Without keeping precise track of the receivables and inventory and liabilities in a forecast as well as day to day sales and expenses, you'd only be guessing how much cash the business really has, or how much it needs. Yet it's forecasting the balance sheet which is potentially the most difficult, primarily because of the arithmetic involved, and is therefore too often neglected. If not now, when?Every business needs a cash flow, and in times of uncertain consumer markets, having a credible business budget and forecast is more important than ever. Risk-averse bank managers know this, and are demanding higher standards of proof. Not having the time to attend to this stuff, is no longer a viable option.Has your business budget fully factored into your short term and long term cash flows:
'Back of the envelope' arithmetic, and simple spreadsheets just won't do the job any more. Juggling the timing of payments and receipts for inventory, sales collections, payables and capital expenditure is not kids' stuff - and there's a lot at stake. 
Managing business riskAs a business manager you know that the security of a business is never guaranteed. It's all about juggling risks, and the more you know, the lower the risk. Using a soundly based business budgeting model to understanding your market and the trends, and objectively looking at scenarios and possible outcomes to eliminate surprises, is the way to get the best quality decisions.Time is moneyYou're busy. You have deadlines.Finding the time for the essential business budget planning stuff is not always easy. Accounting staff have day to day priorities, and business managers are flat out satisfying valuable customers. Messing around with spreadsheets or other software to keep the cash forecasting and budgeting up to date can absorb significant amounts of productive time. Get financeIf you're looking for finance from the bank or investor sources, you need to be confident of your business cash flows, and so does your bank or investor. The cash flow forecast is the key essential element of any business plan.If you provide your home as security, or personally guarantee a business loan, you've got lots of personal reasons for protecting your family and wealth with a credible cash forecast and budget plan. Only a cash forecast which takes account of all timing factors, and is integrated with the balance sheet and profit and loss statements can provide the confidence that you and your bank need. New projects, expansion, new markets and products"What-if" testing of future plans can answer all your doubts before you commit valuable time, energy and resources to a new project. Not only must a new venture stand on its own feet, but the impact of the plan on existing operations must be considered.Using spreadsheets for this kind of analysis is fraught with difficulty, with the complexity all too often leading to poor quality assumptions and unseen errors. Specialist skills and software overcome these flaws, with all assumptions shown clearly, and reports are presented in a simple and clear format which makes sense to you and the experts. |
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