WHAT ARE 3-WAY BUSINESS BUDGETS — AND WHY SHOULD YOU BE USING THEM? — Aspira Financial

 

Any business that isn’t planning for the future is planning to get left behind.

While most business owners know that budgeting is a critical part of their planning, there is some confusion about which components should be included in a budget.

There are three critical elements. Together, they provide the oversight you need for your business — and the key targets to work towards.

They will allow you to make informed decisions based on the reality on the ground, and realistic projections of what will happen in the future.

Just like a pilot monitors a flight plan and may need to change it according to prevailing conditions and advice received from air traffic control, your budget becomes your business’s path into the future.

Remember: what gets monitored gets managed. Budgeting is about preparing for what lies ahead. This is rarely steady and constant, so it needs to be consistently monitored and forecasts managed according to the reality.

This will help you gain an edge over the many businesses out there that are not so agile or prepared for what’s around the corner.

Here’s what your three-way budget should include:

1. Profit and loss

Budgets should begin with a detailed look at profit and loss. What are the costs and revenue-drivers in your business? When these change what is the impact? How many existing customers do you have and what is the average invoice value, for instance?

Use past and present information from management accounts and financial statements to work out your anticipated profit for the next 12 months; and be aware of industry changes that might affect the business.

NOTE: Profitable businesses can go broke! When budgets are solely designed as profit and loss predictions, potential problems can be overlooked; alone, the projected profitability of your business doesn’t consider managing growth and it won’t help you avoid cash flow problems.

There’s a saying, “Profit is theory, cash is fact,” which leads us to the second element of your three-way forecast…

1. Cashflow forecast

One of the main reasons that small businesses fail is poor cash flow management.

As already noted, it is possible to make a good profit but not have enough cash in the bank account to pay bills or repay loans.

Unless the profit is converted to cash in your bank account (e.g. you are invoicing regularly, customers are paying you promptly for services delivered, and your money is not tied up in stock), you may be at risk of insolvency. After all, you pay staff and bills with cash — the money in your bank account — not with the profit figure that appears on a financial statement.

So cash really is the ‘life blood’ of a business. By adding a cash flow forecast element to your budget, you create more consistency in your business. You will make it more ‘future-proof’ and be better equipped to ride things out when cash flow hits harder times. You are prepared and can take corrective measures in the business before a full-blown crisis develops.

Planning ahead for the timing of your likely cash inflows and outflows allows you to identify the need for a capital injection, an increase in credit or to boost your cash flow in some other way.

1. Balance sheet

A balance sheet provides a projected statement of assets, liabilities and owners’ or shareholders’ equity and is the final piece of your budget jigsaw. A simple way of describing what your balance sheet summarises is: what does the business own (its assets), what does it owe (its liabilities) and what’s the difference in those amounts, which is the equity.

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