Financial management is critical to the success of every business. For a small to medium sized enterprise (SME) specifically, you need a realistic budget in place and detailed knowledge of your cash flow. Without this, and a clear plan for your company budget, your business could be on course for failure. Here, Business Rescue Expert, leading insolvency practitioners in the UK, share a comprehensive guide to budget planning for SMEs.
More than 600,000 companies were incorporated in the UK in the UK in 2016, with more than 4.9 million businesses in total in the country. Of that 600,000, almost a third will be predicted to cease trading after three years. For many, this will be a result of poor financial management. Without a budget, your SME cannot plan for a strong and profitable future.
How do I create a budget?
Projection of Sales
To create a comprehensive budget plan for an existing company, take a detailed look back over your turnover for several years. This should enable you to produce an in-depth forecast of your future sales, according to specific times of year, peak periods, seasonal periods etc. Looking at this data should also give you a good insight into where you are successful and where your financial planning needs to improve.
If you are a new business and you don’t have this data readily available, look to analyse your competitors’ data. Your competitors in your industry will have their accounts filed at Companies House, and you can research broader market data. If you are relatively new to your industry, it would be worthwhile purchasing an industry analysis from a data research company, for example, Plimsoll. This data will provide valuable knowledge of the field, and will help provide the basis for your company budget and sales projection.
Many businesses fail to include all expenses in their financial planning, including one-off annual payments, such as licensing or IT purchases. You must collate as much financial information as possible for a detailed budget plan.
A startup business should fully research the costs of starting the SME. Again, research your competitors and their online accounts, as well as the industry standards for a guide. A specialist accountant in your industry, or business mentor may also provide invaluable knowledge for cost control and budgeting; it would be very worthwhile looking into their services.
Another useful tip for company directors is to stay active within peer groups to collect vital information on sales trends and any market changes that could affect the business. Always amend your budget accordingly to take any possible variations into account.
Match your Headings
Once you have the costs and industry information together for your business, you can work to create a realistic budget that you can refer to on a daily basis. Regardless of whether you are utilising data from your company’s historical information, or you’re creating a startup budget, try and ensure your budget income and expenditure subheadings correspond exactly with the layout of your company’s management accounts. You can do so by using your management accounting software to prepare the initial budget draft. Cloud based systems, such as Xero and Quickbooks have excellent facilities for this, at relatively low costs. Once you have got these in order, you can regularly compare your budget with actual costs at a glance, enabling you to quickly change plans and efficiently respond to any fluctuations and unseen dangers for your business.
If you are an established business, it can be very worthwhile to speak to staff holding financial responsibilities within the company, before finalising the budget. Their day to day knowledge could help provide more information on targets, costs and production etc. With this additional information, along with the data you have collected, you should be able to produce a really comprehensive budget plan for your business.
However, if you are still unsure how to create and, subsequently, manage a budget plan for your company, seek advice. Financial advisors, accounts and industry peers will help review your business, providing you with the details for your budget plan. While it may cost for this advice, it will be important in ensuring the longevity of your company.
Ultimately, business budget planning is an essential and ongoing activity. A budget will provide your SME with greater financial security and the chance to thrive in the market.