Modern businesses operate in a dynamic yet high-pressure environment. Lean operating costs are essential not just for continued growth but also for business survival. Here budget and cashflow forecasts become crucial business disciplines. Over coming months we look at key items that company directors must consider in budgeting and forecasting. Here we begin with several factors that are common to almost all businesses:

BLOG: Refresher course: budgets and cashflow forecasts

Sales Forecast

Based on thorough market research, your company should be able to pinpoint the projected number of individual product units it could sell. Your product development forecast and sales forecast must be closely connected. Where a disconnect occurs between these two forecasting tools, your business budget and outlook can be jeopardised.

Say for example your sales forecast predicts sales of $1m from a particular product. Meanwhile your product development budget indicates only $400,000 worth of the product is able to be produced. Such contradiction between the two forecasts may be due to issues like lack of manpower, plant and equipment shortfalls or physical restraint within product development premises.

In such a scenario, you must first satisfy yourself that the estimates relating to production and potential to sell a larger volume of products is realistic. Once satisfied, you could instigate discussion as to whether additional premises are required, a second shift could be worked or other options to facilitate full realisation of sales potential.

Stock budget

It is vital to have a clear stock budget. As a company director, you should continually enquire as to what is the required investment in stock. Do not leave this question until the end of the year or end of financial year. Instead, put the question to your management all year round. Specific key questions to ask are:

  • Have you achieved sufficient stock build-up to enable the company sales targets to be hit?
  • What policies have you implemented to ensure timely stock orders that secure delivery and availability of all necessary stock in time to enable sales? The same question also applies when your company is manufacturing its own stock for sale.
  • Are you budgeting for seasonal build-up of stock levels where this is required?

Expense budget

Your company expense budget can be very broad. In fact, it normally is. Common inclusions in your expense budget are costs relating to relate to salaries, insurance, bank charges, rent, research and development, motor vehicle operating expenses and more. Some of these expenses may have already been allocated in subsidiary budgets such as product development and labour. Such allocation will yield a more meaningful analysis of the individual components of your overall company budget, rather than putting all outgoings into the expense budget.

Ratio calculations of expenses to total turnover should be calculated and compared to actual ratios calculated on your previous financial accounts. Any significant variations should be investigated and corrected.

Cashflow Forecast

Once all individual budgets have been prepared, you are in a sound position to finalise your cashflow forecast for the coming 12 months. As a director, you should ensure that all known expenses are reflected in the cashflow forecast. These may include:

  • Capital expenditure
  • Dividend payments
  • Loan repayments
  • And more

A comprehensive cashflow forecast will highlight any necessary changes in arrangements with your bank. This in itself is a pivotal part of smart budgeting and forecasting.