Budgets are Important

There are a lot of uncertainties at present relating to interest rates; exchange rates; property values; unemployment starting to rise; slower debtor payments; rising cost of fuel; the possibility of tighter lending rules by banks; Taxation Office increased scrutiny in the small/medium enterprise market area. All of these uncertainties highlight the necessity for businesses to spend some critical time working ON THE BUSINESS in planning budgets for the next 12 months.

A budget will show the expected income and expenditure for the business and the emerging profit. You can calculate various what-if scenarios to factor in potential changed circumstances eg higher interest rates; higher fuel costs and if you are an exporter or importer, changes in currency conversion rates.

Budgeting lets you diagnose problems in advance. If the budget that you have prepared doesn’t provide you with an adequate profit, then you can now decide on appropriate action to take to try to achieve your desired profit, rather than waiting for the events to unfold. When the budgets are completed, it is then possible to prepare a cashflow forecast. This will reflect the figures contained within the budget as well as taxation commitments; loan repayments; dividends; drawings; capital expenditure; receipts from debtors and payments to creditors.

It is possible to prepare what-if scenarios for the cashflow forecast on the basis of likely changes in conditions relative to a slow down in debtors’ payments; changed investment levels in inventory using Debtors’ Finance / Factoring, etc. We recommend that every business should prepare a budget and a cashflow forecast for the next 12 months. If the cashflow forecast highlights that you might need an injection of extra funding, now is the time to talk to your bank/finance company or debtors’ financing company or consider trying to raise capital – not later in the financial year when you have a problem!