A good understanding of financial management is crucial to the success of any business. For a small to medium sized enterprise (SME), in particular, you need a realistic and adaptable budget in place, with detailed information on the company cash flow. Without this knowledge of your business, your SME could be on a clear course for failure. Business Rescue Expert, leading insolvency practitioners in the UK, outline the process for planning your company budget and why it is critical to the longevity of your corporation.
In the UK, more than 600,000 companies were incorporated in 2016. In total, there are more than 4.9 million businesses. Of the 600,000 mentioned above, almost a third are predicted to cease trading within three years. This could be due to external factors that may be out of the company’s control, such as changes in the market. However, for many, this is the result of poor financial management.
How do I create a budget?
Sales Forecast
If you’re an already established company, you need to analyse your previous turnover for several years. Take a fine tooth comb through your profits and outgoings to produce an in-depth forecast of future sales. You should also take into account specific times of year, such as the peak periods and seasonal periods for the market etc. This data should provide an insight into when and where your company is most successful, and highlight what areas to improve.
For a new business or startup SME, you may not have this data readily available. However, you can analyse your competitor’s data to establish their place in the market, where they are successful and where they fail. Your industry competitors will have their accounts filed at Companies House, and you can also research broader market data. If you are starting up in an altogether new industry, we recommend purchasing an industry analysis from a data research company, for example, Plimsoll. This data will provide detailed information on the market, enabling you to create a company budget and projection of sales.
Expenses
Expenses should always factor into your company budget. Many companies fail to include expenses, such as one-off annual payments: licensing or IT purchases, for example. Without including all expenses and data, you can not produce a budget accurately representing your company.
For a startup business, especially an SME, you must research all of the costs and outgoings that you will encounter. Use your competitor’s data as a guide for the expenses, as well as industry standards. You could also utilise the services of a specialist accountant for the particular market, or even a business mentor for guidance. Their knowledge of cost control and budgeting could be invaluable.
For company directors, we recommend you stay active within peer groups in your industry, to collect vital information on the sales trends or any market changes that would mean amending your budget.
Match your Headings
With all of your competitor’s data, industry standards or previous turnover if you are already established – you can produce an extensive and realistic company budget. However, regardless of where you’re collecting the necessary information for your budget plan – ensure your budget income, and expenditure subheadings correspond exactly with your company’s management accounts. You can do this by using the services of management accountant software to prepare the draft for your budget. For example, cloud-based systems including Xero and Quickbooks have excellent facilities to aid your budget plan, at relatively low costs. As soon as these are in order, you can compare your budget with actual costs, enabling your company to become adaptable and respond to any fluctuations in the market.
Seek Advice
If your business is already established, speak to staff that hold financial responsibilities within your company. Their input could highlight an area you may have missed, and their day-to-day knowledge may provide more information on production, targets and costs etc.
For those starting up and are still unsure about the procedure for creating a budget, seek advice. There are financial advisors, accountants and industry peers that can help review your business plan and sales forecast, offering invaluable information on the industry and creating a realistic budget. It may cost for their advice, but it will benefit your company in the long-term.
Ultimately, creating a budget for your company is essential and ongoing. A thorough budget plan will provide financial security and the opportunity to thrive in your market.
