Benefits of Planning – second of a series

Today I continue with the second post in my series on the benefits of planning.  In this post I cover what a typical business cycle plan is, benefits of a business plan, and the first steps in creating a budget.

A typical business planning cycle

  • Review your current performance against planned targets.
  • Work out your opportunities and threats.
  • Analyze your successes and failures during the previous period(s).
  • Look at your key objectives for the coming period and change or re-establish your longer-term planning.
  • Identify and refine the resource implications of your review and build a budget.
  • Define the new financial year’s profit and loss and balance sheet targets.
  • Conclude the plan.
  • Review it regularly – for example, on a monthly basis – by monitoring performance, reviewing progress and achieving objectives.

Budgets and business planning

Many small business owners run their businesses in a relaxed way and may not see the need to budget.  However, if you are planning for your business’ future, you will need to fund your plans.  Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc.  You’ll find that money starts to move in many different directions through your organization – budgets are a vital tool in ensuring that you stay in control of expenditure.

A budget is a plan to

  • Control your finances
  • Ensure you can continue to fund your current commitments
  • Enable you to make confident financial decisions and meet your objectives
  • Ensure you have enough money for your future projects
  • Outlines what you will spend your money on and how that spending will be financed.

However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future – defined by your plan that your business wants to achieve.

Benefits of a business plan

There are a number of benefits of drawing up a business plan including being better able to:

  • Manage your money effectively
  • Allocate appropriate resources to projects
  • Monitor performance
  • Meet your objectives
  • Improve decision-making
  • Identify problems before they occur – such as the need to raise finance or cash flow difficulties
  • Plan for the future
  • Increase staff motivation

Creating a budget

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions

What are the projected sales for the by period? Be realistic – if you overestimate, it will cause you problems in the future.  When it comes to revenue projections, “Be conservative” is the rule.

What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?

What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type as driven by your income statement.  I like to build the model so that the line items on the plan, match the line items on the income statement.  While reviewing and budgeting each expense line may seem tedious…it shines the brightest line on the process.

Once you’ve got figures for income and expenditure, you can work out how much money you’re making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you’ve made a budget, you should stick to it as much as possible, but review and revise it as needed.   Reviewing actual performance on a monthly basis against the plan or budget allows the business to make changes as necessary to achieve success.  As I advocate, successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance.

In my next blog post I will continue by discussing the key steps in drawing up a budget, what your budget should cover, and what you will need to include in your budget.

Want to know more before the next post?  Contact A Fractional CFO today to get started.