As 2020 is unfolding, businesses are budgeting for the entire year. The budget process is more than predicting costs and profits. It is about planning ahead for all scenarios in case sales goals go up, down or remain the same.
The importance of having an annual budget
Careful budgeting gives a realistic picture about how the company will fare in the year and reduces the stress from unexpected ups, downs and surprises. It gives both peace of mind and confidence to the business owners and all those involved – management, employees, customers, investors, vendors, accountants, bankers and advisors.
Basic budgeting can offer leadership both foresight and insight for alternative plans if the overall economy is rough. A basic budget gives CEOs a competitive edge.
Budgeting against uncontrollable factors
All businesses face events beyond their control such as government policies, supply chain disruption, global economic events, and other unforeseeable events. By thinking through different possible scenarios in the budgeting process and building in a safety cushion, a company can have some protection to weather difficult times.
For instance, if the economy is heading into a recession, the budget may reflect lowering labor costs and slower turn around of inventories. When consumer confidence is high, it may be the best time to add product lines to take advantage of higher purchasing power.
Budgeting does not need to be exact and detail-oriented, and it should not take too much time. As months and quarters roll along, the budget plan needs to be updated, adjusted, and reviewed regularly.
Here are some tips for creating and updating a budget for your small business:
Predicting annual expenditures with a month-by-month list of fixed and variable costs.
Determining what your business will spend is easier than forecasting revenue, by using past year’s financial information, and involving a company’s division and departmentmanagers to project costs.
Verify with suppliers to get a picture about pricing for the year. Revise initial projections each month as the costs for raw materials, parts and other services go up and down.
Estimate monthly revenue. When setting up monthly projections for 2020 revenue, small-business owners can start with 2019 numbers. It helps to talk to customers at the beginning of the year to get an idea about how their businesses are doing and if their demand for your products or services will change. Then add new customer sales.
Tracking cash flow by the week. Cash flow is not necessarily correlated to sales. It depends on when expenses are due and when cash income is expected to arrive.
Often, payment comes after a business has to pay first for raw materials, labor and inventory. Keeping cash flow positive is like keeping the blood flowing for the financial health of the company.
Update the budget each month. As you work your way through 2020, enter actual costs and revenue and compare them with the budgeted numbers. Keep track of promotional events that might boost sales in certain months.
Keep track of costs and revenue. When costs are more than estimated revenue, the company needs to cut costs and increase revenue. A budget forecast gives the company some time to get out of the red with speedy actions and strategies.
Planning ahead for different outcomes. Create different assumptions for the basic budget to show how the numbers change with sales fluctuation. Develop various solutions if sales changes 20% more or less, or an important customer leaves. Preparing for many possible situations will help focus a company’s resources, time and efforts.
A2zCFO, both the Right and Left Arms for your organization:
A2ZCFO takes pride in helping small business owners prepare for either storms or calm weather, and navigate safely through rough waters. As a consulting CFO, I help business owners and management to “keep your ship on course.”
We help with any aspect of financial management from A to Z. By providing trusted financial advice, I create financial and goal clarity, resulting in increases in cash, profitability and sales all the while preparing the business strategically for a successful exit when the time is right.
- Works at client’s location and directly with client’s staff;
- Affordable and flexibility in hours – 4 hours a month to short term full time assignment;
- Excels at messy and difficult clean up situations;
- Meaningful financial reporting for management, bankers, and CPA’s. Tax returns completed by 4/15;
- Cradle to grave services – from bootstrapped startups to exit transition service experience.
Please call me (925) 216-5058 or email: rolf@a2zCFO.com
A2Z CFO, we keep your ship on course.