Most SMEs wait until their annual statutory accounts when they visit their accountant to find out about their tax obligation. Instead, it’s quite simple to create monthly financial plans and aim for growth.
Many businesses think they need to get it right first time, that’s not the case, it’s about creating regular financial goals. Let’s show you how to get out of that annual accounts mindset, especially if you’re a million-pound business and are still relying on annual numbers.
Your road map – strategic plan > financial goals > adjust > grow
To do this, we first need to begin with a strategic business plan. This plan could be looking forward for a period of a few months or even, three to five years.
Once you have your strategic plan structured, ensure that you have included top level numbers for each of your years and that the growth is achievable. This is usually in the form of a forecast annual profit & loss accounts with maybe some consideration for the working capital aspect of your balance sheet, so that you have a cashflow consideration for your profitability.
The topline figures in year one of your strategic plan will form the basis for the annual budget. The revenue lines may be geographical, product/service based, divisional, etc. I strongly advise that the departmental heads help to build the budget with the accountant facilitating the build. This way, responsibility and accountability for the numbers is placed with the people whose roles have the expertise to make it happen. The financial people then support the departmental heads as business support partners.
The budget is usually built for each month of the financial year and consists of a profit and loss account, a related balance sheet and cashflow forecast. These will be the basic monthly financial reports for your business. There are other financial numbers we can look at in future articles about KPIs.
It’s worth the time and effort to create a budget as it spells out the financial intentions of the strategic plan. Budgets can be based on incremental growth – i.e. taking last year’s figures and assuming a percentage of revenue growth. This is the simplest way to budget but assumes that cost drivers do not change much. Another approach, bottom up, i.e. knowing what profits, you want to make and working out the costs and revenue needed to achieve that profitability, or they can be top down, i.e. knowing the revenue that you wish to make and working out the costs to make a percentage of net profit. There are other budgeting models such as zero-based budgets, which assumes that every year all items are zero and must be built from scratch. Value proposition budgets which consider that everything included within the budget delivers value for the business, a good approach as it looks to avoid unnecessary expenditure but takes time to build.
Once you have built your budget, and have achieved your month one actuals, then it’s a good idea to match your budget against your actuals and consider any key variances from the figures.
There will always be ups and downs. This regular monthly review will help you guide the numbers for future months.
Prepare the monthly framework to scrutinise at your numbers in this format. It may even occur that circumstances affect your initial budget expectations. That’s fine, you can then create a forecast for the year based on your expected budget and the actual monthly outcomes. This forecast, in effect, will override your budget whilst at the same time keeping your overall strategic business goals in your line of sight. Many things require a re-forecast of a budget, elections, pandemics, changing economic situations, issues with major suppliers and many more. It’s always worth an overall review as well as an internal review when looking through the variances of your year-to-date figures, as well as your monthly figures.
These regular strategic plans, budgets and monthly steps will keep your business finances on track to achieving the longer-term strategic goals.
