As a business owner, one of your primary responsibilities is to manage your finances effectively. There are many stakeholders beyond the owners/shareholders such as customers, suppliers and employees. You also have the responsibility to them in adequately and appropriately managing your business finances.
One key aspect of financial management is creating a budget for the year ahead. A budget is a financial plan that outlines your business’s financial expectations for the upcoming year. In this article, we’ll discuss the reasons why your business should budget for the year ahead, as well as when and how to create a budget.
Why should you budget for the year ahead?
There are several reasons why creating a budget for the year ahead is essential for your business:
- Plan for the future
A budget helps you plan for the future by setting goals and targets for the upcoming year. It allows you to anticipate changes in the market, plan for expansion or contraction, and adjust your business operations accordingly.
- Manage cash flow
A budget helps you manage your cash flow effectively by predicting when income and expenses will occur, capital expenditure is required and the cash inflow and outflow around these activites. This allows you to allocate funds to cover expenses and avoid cash flow problems.
- Identify potential problems
A budget can help you identify potential problems before they arise. By analysing your expected income and expenses, you can identify areas where you may need to cut costs or increase revenue. It can also show you where to focus attention such as revenue areas that are more profitable.
- Evaluate performance
A budget allows you to evaluate your business’s performance against your expectations. By comparing actual results to your budget, you can identify areas where you may need to make adjustments to improve your business operations.
When should you create a budget?
The best time to create a budget for the year ahead is before the start of the new financial year. You need to allow enough time to prepare and review the budget, and involve the different functional areas and budget managers within your business. This allows you to plan for the upcoming year and make any necessary adjustments to your business operations.
You should be starting to schedule time now for creating your 2023/24 budget.
How should you create a budget?
To create a budget for the year ahead, follow these steps:
- Review your financial statements
Start by reviewing your financial statements from the previous year. This will give you an idea of your business’s revenue, expenses and capital requirements, and help you identify any trends.
- Estimate your revenue
Based on your previous year’s revenue, any anticipated changes in the market and any changes you may plan for your business, estimate your expected revenue for the upcoming year.
- Estimate your expenses
Based on your previous year’s expenses and any anticipated changes in your business operations including staffing expectations, estimate your expected expenses for the upcoming year.
- Set goals and targets
Based on your estimated revenue and expenses, set goals and targets for the upcoming year. This may include sales targets, expense reduction targets, or profit targets.
- Create a budget document
Create a budget document that outlines your expected income, expenses and capital expenditure for the upcoming year. Be sure to include any assumptions or notes that may impact your financial projections.
- Review and adjust
Review your budget periodically throughout the year and adjust your business operations as necessary to ensure that you are on track to meet your goals and targets. Maintaining an ongoing forecast for the year end ahead will help you ensure any potential problems or cash flow needs are addressed early.
In conclusion, creating a budget for the year ahead is essential for effective financial management. By planning for the future, managing your cash flow, identifying potential problems, and evaluating your performance, you can ensure that your business operates successfully and sustainably. Be sure to create your budget before the start of the new financial year and review it periodically throughout the year to make any necessary adjustments.
The FifthEagle team can provide you and your finance team the support to ensure you establish effective budget management and financial controls in your business. From mentoring and advisory, guidance and reviews to more hands on creation of company-wide budgeting, we can assist with as little or as much help as you need so get in touch today so we can discuss your needs.