Member Article

Why a budget can keep your business on track

Although the Chancellor’s budget may seem a million light years away, the importance of small and medium sized businesses planning a budget to keep their business on track has never been greater.

At least two months before each financial year begins, businesses need to forecast their income, spend and profit. Preparation is an essential part of any business strategy to ensure any pitfalls will be uncovered.

Planning will enable a business to prepare a budget for the next 12 months and establish how much cash is needed to support growth – cash is the most important number to focus on so cash flow forecasts play an integral part of any SMEs’ strategy.

It is important to set a sales and profit figure so that there is a clear vision of where the business is going. But be warned, while a sales budget can give a realistic idea of sales growth, if has been produced by a sales person, the chances are it will be wildly optimistic and will need careful scrutiny.

A boost in sales will prompt the recruitment of staff but this should already have been taken into account when preparing a budget. Effective planning will advise of the outlay required and also the cost of not recruiting quickly enough.

Comparing the budget to the actual business performance will give a good insight into profit margins and allow action to be taken if these are not where they ought to be.

Whilst it may be assumed that all organisations are adopting these strategies, they are not. I once encountered a prospective client who advised me that despite being in business for 23 years, he had never put together a budget. A move I advised was unwise.

Ultimately, a good business is all about growing profitable sales, staying ahead of the competition and knowing which products are losing money and making money.

Many SMEs believe the recovery of the UK economy will boost their growth – however it is important that they take action within their own businesses to plan effectively.

Finally, while a budget is crucial, it is important to remember that it is not about being 100 percent accurate but about being in a better position to predict - and manage - the future.

Russell Smith is the managing director of Leeds-based Russell Smith Chartered Accountants. His areas of expertise include accountancy for nursing homes, healthcare, dentists, opticians, insurance brokers, marketing companies, digital technology, website design, musicians and artists.

This was posted in Bdaily's Members' News section by Russell Smith Chartered Accountants .