Do You Know If Your Business Will Make a Profit This Year?
In my last blog post we explored the aged debtors and aged creditors reports. The fifth part of our series of blog posts on ‘Understanding Your Numbers’ will look at the annual budget to identify what information it provides and how to make the best use of it.
Your Budget report is an estimate of what your income and expenses will be for a future given period – usually. It is invaluable for planning your business strategy. Your Budget records what you plan to do with your finances based on expected sales and expected costs.
Budgets are usually for a 12 month period (depending on your business) and have a focus on profit. Budgets include more than cash income and expenses.
They also typically include:
- Making provision for non-cash expenses like the loss in value of equipment as it ages.
- Plans for buying major new equipment, etc.
Your Budget is a benchmark so you can compare what you plan with what actually happens. The best use of the budget is to compare it with your profit and loss statement once a month to see where you are going off course. You can then pin point problem areas to work on.
The process of making that plan gives you a fresh look at your business and what you want to achieve.
When we prepared a 12-month budget for a software development company it became apparent that the business was very dependent on new sales to be profitable. Their current customer base was not going to be enough to sustain the business. It was new customers signing up and paying large up-front fees that were keeping the business profitable.
During the months where there were no new customers, the business would operate at a loss. This told their management that they either had to focus on sales and keep driving new business through the door on a regular basis or offer additional services to their existing customer base to increase spend.
Next month we will continue our series of blog posts on understanding your numbers, where we will explore the cash flow forecast to discover what information it provides and how to make the best use of it.
Do you take the time to prepare a budget? If you do, are you comparing it to actual results in the business?
Has budgeting helped your business? I would love to hear your thoughts!