Budgeting for the year ahead
As we come to the end of 2021, it’s a great time for you to start thinking about budgeting for the year ahead.
Business planning and setting budgets is become increasingly complicated in today’s uncertain and volatile marketplaces. We have all had to adapt and become more agile in order to react quickly to changing market conditions and your forecasts should be created with this in mind.
The best place to start the process is with your fixed costs – the things that you can be certain of such as rent, rates, staff costs (remembering to factor in the recently announced changes to the Nation Living Wage), before moving onto those areas where there is some variability such as raw materials, light, heat, electricity, IT, etc.
Next, turn your focus to the longer term aspects of your budget with an analysis of existing strategic or capital spending plans.
Stress test the assumptions, scenarios and decisions that have gone into your draft budget. What if your sales don’t grow next year? What if your annual income falls by 10%? How does this affect the profitability and cashflow of the business?
Optimistic, realistic and pragmatic
In uncertain times, it is important to be realistic. Create 3 scenarios for your budget – optimistic, realistic and pragmatic. Start with the realistic scenario – the “expected” outcome and from there you can derive variations on whether things turn out better or worse.
Scenario-based budgeting is not intended to predict exact outcomes, but should give you an indication of what to expect if things pan out better or worse than you are hoping. This will help you to formulate in advance what your response could be.
I would advise that you include some element of additional spending as a contingency. This builds some flexibility into the budget so that the business can react to changing circumstances as the year progresses and won’t be caught out by unexpected one off expenses.
Always calculate your budget using current data, what you are actually spending now, rather than budgeting for the year ahead based on some mythical figures taken from last year’s budget. Be realistic about where your levels of expenditure are likely to go.
Finally and most importantly, build realistic income models. Ensure you provide for bad debts and write offs in each of your scenarios. Cash is king and in uncertain times every business must focus on getting cash in on a monthly or even weekly basis. Billing cycles and cash collection should be at the top of the agenda for your management team. Offering extended payment terms to customers is an added risk and should be avoided as much as possible. Build these principles into your budget and ensure you keep adequate reserves in case you encounter headwinds during the year ahead.
Call Brian Russell on 01661 872004 to discuss budgeting for the year ahead.