With a new financial year just under way you have the opportunity to financially map your business. If you get this financial mapping right, you reduce your risk and remove some of the surprises that can occur along the way.
Start by putting together an operating budget for the business. All businesses should have budgets in place, to ensure that the business needs are being met, especially in these uncertain economic times. The budget should not be last years’ figures adjusted by some percentage. Instead, look at each line item in your budget and assess it critically. Start with your revenue and work up a reliable estimate of your income for the coming year.
You should start to think about what marketing or other activities will be required to produce this income for your business. Once you are comfortable with the income estimates have a look at your expenses and again work up your expenditure budget. Be tough on your costs. Can you manage your costs more effectively? Oculus accountants can help you assess these costs and look at some tax minimisation strategies to keep your costs down. Also allow for increases that are likely to flow through into the current year or any additional costs you will incur due to growth. Working through this exercise should allow you to produce your operating budget and identify your likely profit for the coming year.
Once you have this figure then it might be an idea to do a couple of alternative estimates so that you understand the impact of changes in your assumptions. Once you have your forecast profit position reduce that to a cash flow forecast. You need to know both your profit and cash position. Arriving at your cash position is about understanding the timing differences: How long will it take for your customers to pay you? How much stock will you need to hold? And, what are the payment terms required by your suppliers? With your cash flow, don’t forget to allow for things like tax payments, loan repayments, dividends and any capital purchases that are planned. These can be ‘big ticket’ items and if you don’t allow for them then you will get caught out.
As part of your cash flow forecast identify your capital expenditure requirements. Don’t deal with these on a one-off basis as they arise, plan them in advance.
Once you have these in place you have your financial road map for the year.