The most common challenge faced by business is the management of cash flow or lack thereof. To understand why cash flow is poorly managed we need to look at the underlying cause. This generally occurs due to poor budgeting or a lack of a budget entirely.
What is a budget?
The oxford dictionary has a few meanings: “the amount of money needed or available for a purpose” and “an estimate of income and expenditure for a set period”
It is important to note that a budget only forms part of the necessary requirements to crack the profitability enigma.
1. Budget (including a breakeven and profit breakeven analysis)
2. Cash flow forecast
3. Monthly Management reports and regular meetings with your accountant.
4. Financials Statements: Income statement and balance sheet.
The combination of a budget and a cash flow forecast, considering your fixed costs and variable costs will help you identify your breakeven point.
Monthly management reports and meetings will allow you to have accountability for your budget, while measuring your performance against it.
Regularly producing up to date financial statements will not only help you if you require finance but will also give you a clear picture of where your business has been and help you identify the key areas which need improvement.
Breaking Even
A good budget must include a profit breakeven. A profit breakeven is based on your standard breakeven analysis but incorporates your expected or budgeted profit. A normal breakeven analysis will help to ensure you are meeting all of you commitments but it lacks the forward thinking view of increased profitability. After all everybody goes in to business with an idea of growth and profit. You can calculate your margins by using methods such as return on investment of percentage of sales. Whichever method you use it is important that you use a realistic figure and develop your business plan around reaching these targets.
A budget is a working document and should be reviewed an updated on a regular basis. By regularly reviewing your budget and tracking your performance against it you will be able to react quicker and take necessary actions to ensure your targets are being met and exceeded. It is important not to fall into the trap of downgrading your targets and reducing your goals rather than taking corrective action to achieve your desired outcomes.
Once you have created your budget you can use it to create financial KPI’s for you and your staff. A good budget needs to include your profit targets and estimations for expense increases, provisions for GST, income tax and bad debts.
With a good budget, the cash flow forecast will then managed the timing differences between the protected income and expenditure and when the money actually hits your bank. Together with monthly management reports and meetings you’ll be able to analyse your projected performance against your actually performance and will be on the road to a more profitable and successful year.
If you would like to learn more about how budgeting and regular management meetings can improve your businesses profitability, contact us on 07 3359 8333.