We’re fast approaching the end of 2019 (can you believe?!). Now is the time to be proactive, think about the year ahead, and put some financial plans in place. We’re going to be talking about your budget. Though it seems like a boring topic for the Christmas office party, a detailed budget based on accurate up-to-date numbers is one of the most valuable tools you’ll want to take into 2020.
Right now, we’re in rather uncertain times in many countries around the world. When things are uncertain outside of our business, it can feel like we need to hang on in there before we make any solid plans within the business.
But no matter what the external circumstances, we can still take control of our internal performance and plan for growth. A good budget can help you to grow a business that is strong enough to weather any upcoming storms.
You will need to update your first (ever) budget
You may have been aware of the importance of a budget when you started out. If you approached a bank or investor for finance, you’ll know that they don’t like seeing a business plan without one. It’s likely you put one in place as a mandatory part of the investment process. Chances are though, that budget was formulated on mostly guesswork, and may not have been updated since.
Don’t try and operate the machinery blindfolded
SME’s are born of enthusiasm and entrepreneurial excitement, but we all know that no business can survive on enthusiasm alone. If you update your original budget or put one in place each year, you may continue to run on enthusiasm, but you’ll also be running your operation blind. Without some insight into how your year is going to go financially, you’re vulnerable to pitfalls and surprises without a plan for surviving them.
Although a budget is an estimate, it’s not an estimate pulled out of thin air. To be able to make a realistic estimation of your performance going forward, you need to know how well you’re doing right now in the present.
The most efficient tool to help you understand your present position is a digital accounting software that provides you with real time data capture. Real time data capture enables us to get key information out of your business. This includes:
- How much money is coming in and out of your business (your profit and loss)
- The difference between what you owe and what you own (your balance sheet)
When you have all these key numbers you’re able to assess your cash flow position for the upcoming year, knowing how much money is going to be flowing in an out of your business. The important thing is that you’re not relying on information that’s months, or even an entire year, old.
Budgeting is about planning for the decisions in your business (not just projecting numbers)
The key numbers are just the start – they help you to know. But a budget is about more than just knowing where you stand as you go into the next year, it’s about planning out the year itself.
Where do you want your business to go, and what do you need to grow? Your budget can help you to think practically about these decisions. Whether you’re looking to employ another member of staff, open another office or invest in more inventory, budgeting will help you see what’s possible. It’ll help you assess different arms of your business and scale up your operation, rather than make decisions on lack of information and suffer the consequences down the line.
Having an insight into what cash flow is going to look like next year will also help you to create a contingency plan. Knowing how you’ll handle losing a big client or seeing your office rent increase is just as important as knowing you’re able to take the leap into an exciting growth opportunity. In a sense, a budget helps to ensure that all change is positive, even if the change wasn’t expected.
Start planning now
Our advice is to be ahead of the curve and begin to plan now whilst this past year is fresh in your head. If you’re already using Xero, you can begin by looking at those key areas – the profit and loss, balance sheet. If you’re not using Xero (or any digital software), start by looking at why it’s the platform of choice for growing a connected a forward-thinking business. To get a clear view of your cash and create realistic scenarios based on your current and future cash position we recommend syncing the float app with Xero.
If you make a start now on the budget now, you can always revisit the plan after a well deserved Christmas and New Year breather.
And as always, we’re here to help you put all this together and advise on the most profitable moves for 2020. Here’s how we can support you.