Probably one of the most important tools for small business success is the financial budget. This is a forecast of the expected revenues and expenses that will be generated by the company’s operations for a specific period of time in the future. The time period ranges from a few months to a year or more in the future. Financial budget also includes a cash flow forecast for the same period.
Important features of a budget
Many small business owners are confused when asked to submit a financial plan for their business operations. Nevertheless, this dossier is essential to better assess the long-term feasibility of a project. Moreover, it is often the most important piece of information bankers refer to in the business plan when deciding on your application for a loan to support your operations.
Although budgets can be created for almost any area of the business, such as operational areas like purchasing and inventory, monetary budgets provide the most meaningful information for your overall decision making. The financial plan is an important part of your company’s financial planning. It includes a careful analysis of the various revenue and expense categories that are likely to impact your company’s long-term profitability and liquidity. Accounting and Bookkeeping Services Melbourne
Typically, budgets are prepared to supplement financial statements, but they are generally more appropriate as monthly, quarterly, or twelve-month profit and cash flow projections. Monthly budgets provide information about the projected revenue the company will generate from its operations and the projected related expenses. This effective tool helps you keep up to date with your company’s financial situation. It allows you to make appropriate decisions that affect the company’s operations, such as when to cut costs on non-essential services to take advantage of outstanding funds when sales are poor.
Monthly sales forecasts are compared to an estimate of the costs your business will incur in relation to sales. The costs include book values for write-offs and an estimate of probable bad debts. Cost of sales is subtracted from sales to arrive at projected gross profit. The projected gross and net profits in the financial plan are what your business could ideally generate given the expected sales.
What financial plans show
Your accountant prepares a budget for your income statement and balance sheet based on a number of assumptions. These consist of the percentage by which sales will increase from month to month and increases in expenses for purchases. The growth of your business is most evident in the increase in sales. Based on your budget, you will be able to determine if the pricing structure of your products is too strict and how this will affect your gross profit. You will know what it will cost to maintain the inventory levels required for projected upcoming sales and the corresponding purchasing costs. The projected operating costs will give you a reasonable idea of your expenses in the coming months. Small Business Bookkeeping Services
By analyzing your budget, your accountant can advise you on the impact of new purchases, such as buying a brand new forklift. If you intend to take out a loan to expand your operation, the budget will reveal the impact of that type of financing on profits due to interest or principal payments.
Cash flow forecast
Once your financial statements are prepared, your accounting department. Will prepare a cash flow forecast for the same period for which the financial statements were prepared. The cash flow forecast is a report of cash inflows and outflows from business operations. It provides information about the liquidity of the business.
The cash flow forecast takes into account expected receipts from. Customers for sales made and expected payments to creditors for purchases made. The net result of inflows and outflows could be a net inflow of cash. Into the business or a net outflow of cash from the business.
If your company has a net inflow of cash. It is an indication that your company is liquid and financially sound. An illiquid business is a prime target for ruin as lenders foreclose on unpaid debts and creditors initiate proceedings to recover their losses.
A business can be extremely profitable. However, if it lacks sufficient liquidity, the company cannot pay its debts as they come due.
With a budget and cash flow forecast, you can get a very good idea. Of whether or not your facility will remain a viable business. It is an important means of controlling your business and essential to knowing which direction your business is heading. Without a budget, you won’t be able to know if your sales are enough to cover the expenses you incur. You won’t be able to determine your profits for future periods and can’t. Make rational plans for growing or cutting operations.
The cash flow forecast shows how much money your business. Will make in the coming months and what its liquidity will be. A net cash inflow bodes well for the success of the business. Accounting Consulting Firms in Australia