Many SMEs do a budget or cashflow forecast when starting the business but then it just gets left. The problems of dealing with day to day challenges can mean you miss out on the bigger picture.
A budget is a plan which helps you to
- Control the finances of the business
- Helps management to make financial decisions with confidence
- Gives greater clarity on what funds might be available for current or future projects
A budget allows the business to continually track where they are financially and can help attract potential investors. In order to be effective management need to continuously refer to and update the budget.
Budgeting is particularly important for small businesses because the funds can often be limited and even minor changes in income/ costs can have a major impact.
A company can be profitable and still run out of money. Your customers may pay you at a later date than you need to pay your suppliers. A cashflow forecast is a plan of how and when funds will move into or out of your business. It will give you a better understanding of what your bank balance will be and what you can afford to pay out.
Once you’ve done your cashflow forecast you need to keep it updated with your accounting transactions. So if a customer is late paying you can see what impact that would have on your business.