How a budget can protect you from financial hardship
We’ve all heard the worrying statistics about how many businesses fail, but have you ever stopped to consider the leading reason why?
Cash flow issues will make or break your business. And it’s not just a lack of cash flow as you might assume; poor cash flow management could sink an otherwise profitable business. According to a report released by the Australian Securities and Investments Commission (ASIC), inadequate cash flow or high cash use was the most commonly nominated reason for business failure. This was followed by poor strategic management and trading losses. Even less heartening, company insolvencies jumped from 8,794 in 2014 to 10,164 in 2015.
However, it’s certainly not all doom and gloom. Small business is booming in Australia, making up 96 per cent of all businesses. And the number of actively trading businesses increased between 2014 and 2015, despite the jump in the number of folding businesses for the same time period.
While many operators are busy battling the day-to-day issues of small-business life and budgeting can take a back seat, taking an ostrich approach to your finances and putting your head in the sand is one of the worst things you can do.
A report released by Veda, a leading credit reporting bureau, business failures rarely come out of the blue, despite what media reports declare. For example, retailer Dick Smith had numerous red flags for years ahead of its eventual demise. The organisation was trading in a highly competitive market and suffered slow turnover, high debt and – you guessed it – poor cash flow.
The trick to ensuring your success is to get on top of your cash flow issues early on and be able to see signs of financial distress that may loom on the horizon.
What a budget can do for you
The humble budget is one of the most powerful tools you can have in your arsenal. Here are some of its functions:
- Allocating resources
- Curbing expenditures
- Monitoring business progress
- Income and expenditure forecasting
- Finding and fixing any product or services bottleneck
- Evaluating project performance
- Analysing and reviewing assumptions
- Creating a financial – and overall business – roadmap
- Strategic planning
- Modelling scenarios
Avoid budgeting mistakes
So you’ve crafted a budget for your organisation. But, be honest, is it any good? Don’t fall for the following:
- Drawing it up, but not sticking to it. Or worse, never looking at it again. And don’t rely on your memory to recall everything – even if you are a micro company or sole trader.
- Underestimating costs and overestimating revenue. While it might make you feel warm on the inside, it won’t feel so good when your unrealistic forecasting falls through and you can’t pay the bills.
- Being too rigid. You need a little room to move in case of any unforeseen situations that may arise. Also remember that expenses fluctuate regularly, so you must allow for that.
- Only including the big items. The little things really add up and can take you by surprise if you haven’t included them somewhere. Most small businesses simply cannot afford to haemorrhage money like that. Also look to where you can cut costs, change suppliers or upgrade operations that are weighing you down. For example, could you take some production online instead of constantly paying for expensive stationery, printer ink and couriers?
- Not revisiting and refining it regularly. This is a living document that changes as your business does. What may have worked last quarter may not suit your situation now. Regularly compare your estimations with your actual numbers to keep track of your progress, and update the budget wherever necessary.
- Forgetting about your taxes. The government is not forgiving of your oversight.
If you’re interested in strengthening your business’ future in 2017, Reep has cash flow planning, budgeting and forecasting facilities that can help improve your business practices. It integrates with MYOB, Agrimaster and Xero accounting software platforms and can be easily shared with your accountant and financial advisors. For more information, contact Reep.