Look to the future with planning to ensure you are running your business successfully.
When you think of taking a holiday, you make decisions about where you want to go, what you want to see and what you’ll do during the trip. Even if you decide to go where the whim takes you, you’ll still see the signposts along the road and make decisions about which way you’re going to go.
Business is no different to planning a holiday, you need to have a plan on where you want to go and how you’re going to get there.
Firstly, you need to set financial goals, this may be a revenue target, or a profit target or capping expenses at a particular figure, it’s your choice what is important to you.
Using those goals put them into a budget projection and fill in the rest of the details with the cost of sales, expenses and other payments. You may do this initially using annual figures and then break them down into monthly figures taking into account any seasonal fluctuations that may be appropriate.
Once you’ve created the budget for the income and expenses of the business, the next step is to use that information to prepare a cash flow forecast.
The difference between the two relates to the timing of when your income will be received and when the payments will be made.
For example, in the budget, you have $200 per month for insurance, but for cash flow purposes you pay the premium annually in June and so the cash flow will have $2,400 in June and nothing in the other months.
Similarly, electricity bills which cover a three-month period. For cash flow purposes you need to identify which months your electricity bills are due and put the amounts in those four months of the year whereas the budget would have amounts in each month of the year, either an average of the whole year or if you have significantly higher costs in a few months due to say heating or air conditioning you may choose to take each quarter’s expected bill amount and divide it by three and put that in each month.
Now that you’ve created a budget and cash flow forecast for the business you have the baseline for your business for running your business over the next twelve months.
As the months go by, you may notice differences, there may be new opportunities that come your way or decisions that you need to make about the business that you hadn’t anticipated when you set the goals for the year.
These are your signposts along the way, but a bit like a map that will show you where you’ll go depending on which road you take, so too your budget and cash flow can assist you to determine which decision is best for your business.
This may mean having three different versions, the original ones, one for one decision and one for a different decision. With the different options in front of you, you can then choose which decision to take knowing what the effect will be on your financial goals, your expected profit and your cash flow.
Without setting goals and creating the budgets and cash flow forecasts to support them, it’s like putting together a jigsaw puzzle without seeing the picture of what it will look like. You’re running your business blindfolded hoping you won’t run into a bump along the way but not being able to see where you’re going. You wouldn’t do that for your holiday, or to walk down the road, so why do it in your business?
End of the financial year is a great time to be planning for the next financial year, but the reality is you can set financial goals, create budgets and cash flow projections at any time of the year.
Don’t use the fact that it may not be the end of a financial year, or a quarter as an excuse for putting off preparing these vital reports. Creating these financial reports will help you see and focuson the future of your business at regular intervals throughout the year and keep you on target.
Originally published on www.smallville.com.au