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Business Budgeting – Thinking About Your Future

Most businesses are doing really good if they have their historical books up to date on a regular basis. Real-time accounting can get you very close to this reality, but it’s still historical information. Very few small to medium sized businesses have the time and expertise to ponder about the future and make regular budgeting and planning a reality.

There are two types of budgets that I’m fond of using: “most likely budgets” and “big goal budgets”:

  1. Most Likely Budgets: An excellent tool for mature businesses that want to make sure they are staying on course quarter by quarter and year to year. These budgets are usually pretty easy to roll forward as the relationships between accounts are pretty consistent and the goals are usually pretty similar from one period to the next. The focus here is on not messing up a good thing and staying on track.
  2. Big Goal Budgets: A must-have for a growth oriented business that wants to add accountability to their big goals for growth. Large or small, if your business is aggressively pursuing growth, budgeting the cash flow is critical. Many profitable businesses have closed their doors due to poor cash management. Keeping historical information up to date and comparing actual results against budgeted plans is an excellent tool for keeping the business green (with cash) while it grows.

For either one of these budgets I would recommend forecasting the Income Statement (Profit and Loss), then iterating the effects on the Balance Sheet under various assumptions about receivable periods, payable periods, inventory turnover, and financing choices. All of these items have significant impacts on cash flows and their timing. These often answer the question, “If the business is profitable, where is the money at?”

The Cash Flow statement should also be projected for any potential rough patches (cash crunches) so you can take actions to mitigate those effects. The worst time to ask a bank for more money is when you actually need it. If the bank understands (and knows that you understand) your cash needs in detail, they are often more willing to be flexible with access to operating lines of credit.

Another significant consideration for cash management is to budget for the seasonality of the business to ensure there is enough cushion in working capital to weather the lean times and get to the green times. This is where annual budgets are not enough and either quarterly or monthly budgets become necessary to identify the working capital needs in the lean times of the year. Analysis of historical financial information can assist in measuring the impact and extent of seasonality beyond the anecdotal “slow time of year” we all seem to hear about.

There are some very good tools that can help business owners make projections of all three financial statements. Some that are relatively affordable and well worth the cost considering the headaches they will save when compared to building these models in an Excel spreadsheet. Some of them also play nice with accounting systems and import actual data from the accounting system to compare against the budget with automatic integrations.

Business budgeting helps you keep your focus on the things that are important. It helps you make good decisions based on well considered plans and information rather than making reactionary decisions based on fear or anxiety.

Shane Eloe About Shane Eloe

Shane has 12 years of experience in public practice and specializes in working with agriculture and construction businesses. If you have questions for Shane, please send him an email. To see his latest posts click here. Click here to connect with Shane on LinkedIn.

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