The economic news is full of uncertainty for businesses of all sizes. What will Brexit look like? How will Trump's election affect global trade? The only certain thing is that there's plenty of uncertainty.
Having recently relocated our business to Wilmslow, we're advising many local businesses on how to prepare when the economic outlook is unclear. The basic advice is that it's more important than ever to have a vice-like grip on budgets and forecasts. You are then more in control of how you grow your business and ready to spot the early warning signs if things start to go off track.
A good forecast will integrate the profit and loss account, balance sheet and cash flow. It will be flexible enough to enable you to understand quickly changing market conditions. It will also focus on the working capital requirements of the business. Rapid growth can be great - but not if you run out of cash.
Core Business Drivers
The key is to go beyond headline growth targets and understand what really drives your business. Rather than a general target of growing by 10%, develop specific targets and key performance indicators for each of your products or services.
You'll then have a better picture of whether the growth you are planning is realistic. You can be much more focused on the activities needed to make the growth happen: how many leads do you need? What pricing strategy? Do you need a bigger or better sales team?
When you understand the key drivers of the business it's much easier to populate a more meaningful budget and set meaningful business targets. Monthly management information and weekly flash reports also become more helpful as you are tracking the factors that will really affect performance. Budgeting is a fundamental tool to allow you to deliver a strategy. It ensures there is enough cash in the business to deliver growth aspirations.
If you're in control of your finances and budgeting you're in a better position to approach your bank if you have a temporary cash shortfall. Seeking an overdraft with plenty of notice and with a sound budget in place will look less risky than a business reacting to events. Higher risk could translate to higher interest charges and less chance of getting the finance approved.
Sound budgeting puts you in a better position to cope with uncertain trading conditions. If business takes a downturn you will see it coming earlier. You can make better decisions on how to cut costs, for example, without harming longer term prospects. If things turn out better than expected you'll be more able to capitalise on the opportunity.
Visit www.langricks.com or contact us on 01625 697940 if you would like Langricks Chartered Accountants to create a useful financial forecast for your business.