Accounting Tips: Budgeting in Uncertain Times
Financial Director Services for Startups & SMEs
As we approach the end of 2021, its time to start thinking about the budgeting for next year.
Business planning and budgeting have become increasingly complex in today’s uncertain and volatile environment. Firms have had to adapt and become more agile in order to react quickly to changing market conditions and budgets should be created with this in mind.
In this week’s newsletter, Dragon Argents’ accountancy service team in London have shared some budgeting best practice that should help you create robust yet flexible budgets to chart business performance heading into 2022.
Fixed Costs
Start with your fixed costs – the things that you can be certain of such as premises, staff costs, raw materials, light, heat, electricity, IT, etc. Fixed cost are the foundation upon which you can build certainty into a budget. Once you have mapped these out, turn your focus to the longer-term aspects of your budget with an analysis of existing strategic or capital spending plans.
Test Assumptions
Stress test the assumptions, scenarios and decisions that have gone into your draft budget. What if your sales don’t grow next year? What if income falls because 10% of your customers leave and go to another provider? How does this affect the profitability of your business?
In uncertain times, it is important to be pragmatic. Create 3 scenarios for your budget – high, medium and low. Start with the medium scenario – the “expected” outcome and from there you can derive variations on whether things turn out better (high) or worse (low).
However, it is important to remember that scenario-based budgeting is not intended to predict exact outcomes. It is an art, not a science designed to inform strategic discussions and decision making. It is intended to help the business to understand the likely variances and prepare accordingly.
Contingency Planning
Hold back some spending centrally as a contingency. This builds some flexibility into the budget so that the business can react to changing circumstances as the year progresses. Calculate your budget using a combination of new data (market drivers, competitive analysis etc.) and your own businesses historical data on previous performance. But be aware that budgets may have been squeezed in the past 18 months may not reflect the current or predicted market trends.
Cash is King
Finally and most importantly, build realistic income models. Ensure you provide for bad debts and write offs in each of your high, medium, and low scenarios. Cash is king and in uncertain times every business must focus on getting cash in on a monthly or even weekly basis. Billing cycles and cash collection management should be at the top of the agenda for the management team and offering extended payment terms to customers should be avoided as much as possible.
Build these principles into your budget and ensure you keep adequate reserves in case you encounter headwinds during the year ahead.
Financial Director Services for Startups & SMEs
We offer fantastic Financial Director Services for businesses of all sizes and stages of growth. If you would like to discuss how Dragon Argent accountancy team can support your budgeting and reporting processes, please feel free to get in touch directly or schedule a discovery call today.
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