Budgeting and forecasting can be a very powerful tool when done right. It helps you plan, set business goals and track performance. If you are planning to scale or maximise your profits, below are 10 ways to get the most out of your budgets.
1. Keep It Flexible
We live in a time of rapid change in the business scene. This means forecasts and budgets need to be fluid and require constant updating. Any changes and their impact on your business need to be factored in as the year progresses. Continuing to base decisions on the best guesses made months prior can lead to outdated and costly decisions. In addition, holding employees to metrics based on out-of-date information could become counterproductive and frustrating. Building flexibility into your budgeting and forecasting will allow for more accuracy and better results for your business.
2. Roll Forecasts and Budgets
One way to incorporate fluidity in your budgets is to prepare quarterly or monthly budgets depending on the size of your business. This helps you stay current with your predictions and assumptions and is not based on what management thought may happen several months ago.
3. Communication is key
As the forecasting and budgeting is a strategic tool, it is important that the budgets are communicated to all the relevant members of the team. Open communication ensures synergies are built and every member of the team is focused on the same goal.
4. Team work makes the dream work
Budgeting and forecasting should be a team effort so that departments and units have a clearer understanding of their needs. As well as the people in your finance department, having people with their pulse on the various departments can give you the data you need to make accurate predictions and set realistic budgets. Moreover, using your entire team allows you to have multiple perspectives on where your business is now and where it could be in the future.
5. Make logical assumptions
Although budgets are quite heavily a guessing game, they are only valuable if the assumptions that have been made a reasonably accurate. This is why it is important to base predictions on a combination of historical financials and need to take into account any new or expected changes in the performance of the business. Documenting assumptions, listing out major customers and adding in detail around expenses helps achieve a more realistic picture.
6. Play with Scenarios
You can’t plan for everything, but you can have an idea of some of the obstacles that could affect your initial forecast and budget. Review external market and economic trends that may negatively impact your company. On the other hand, if you forsee a possible opportunity that may boost your business, you could create an alternative scenario to assess how this would impact your budgets and whether or not the opportunity would be worth pursuing.
7. Set Profit and Cash Flow Goals
Profits and cash flows are two key metrics that every business needs to focus their attention on as they can make or break the future of any business. Having profits but no cash flow means ongoing commitments can’t be met. On the other hand, having cash but no profits, yes you guessed it ..is a warning sign that it may not be a viable business. Which is why budgets need to be set so they can monitor both cash flow and profit projections that are in line with the strategic goals.
8. Let Excel Go
Don’t rely on Excel or other spreadsheet software to do your budgets and forecasts. Budgeting softwares can go a long way in making the process easier and less time consuming. Cloud-based systems have quickly become the standard for all areas of finance, not just bookkeeping services. When implemented, they allow for more flexibility, as well as better security and cost savings, than manual options. They allow you to generate accurate predictions and budgets quickly and with minimal errors.
9. Bookkeeping is key
Now that the budgets are done, it is time for analysis. How did the business perform compared to the budgets? Were the profit goals met? The answer to this of course relies on the quality of bookkeeping, a requirement that should not be underestimated. Once you have the confidence that your bookkeeping is accurate, doing a regular budget vs actual analysis can help businesses get on the front foot and react to variances before it is too late.
So now that you know some of the key steps, are you ready to take your business to the next level?