Get set for the year ahead now with forecasting, budgeting, and effective cash flow management.
Companies have faced several unexpected challenges over the last two years, with the coronavirus pandemic and its new variants constantly altering our lives and the way we conduct business. But 2022 is a new year, and it is essential to be prepared for any obstacle that might be coming our way.
What factors should I consider?
There are several key factors to consider when preparing your business for the year ahead, including budgeting, forecasting, cash flow, management accounts, and business planning, which can all help you achieve your goals.
Budgeting is one of the key components of any business, ensuring that you stay on track by budgeting expenditure months and years to manage cash flow.
Typical outgoings include rent, taxes, vehicles, daily expenses, emergencies & repairs, energy and utility bills, insurance, payroll, marketing & advertising costs, plus any one-off expenses, planned investments, upgrades, and professional fees.
Having either less money coming in and more money going out, or a chaotic cash flow is one of the most frequent factors in business insolvency.
Recent research has even revealed that late payment of invoices is the cause of one in five company insolvencies, and at a particularly challenging economic period, it’s more important than ever to ensure that you’re managing your cash flow effectively.
Despite larger companies being the sole cause of cash flow problems among the small and medium-sized enterprise (SME) community, how they conduct business is out of your control. Therefore, SMEs need to think carefully about business decisions, such as who they do business with.
Obtaining a contract with a larger company, which has a reputation for late payments, may not be the optimum use of your resources. It may instead be more prudent to consider acquiring several contracts with firms that are more reliable payers.
These might be smaller individual contracts, but importantly, this approach spreads the risk and develops more business relationships to ensure a good, consistent flow of cash.
Forecasting and management accounts
Planning for the unexpected, such as the events of 2021, is an essential step an advisor can help you with, and it will need to be as accurate and comprehensive as possible to create a precise cash flow model.
Successful businesses are only as strong as their strategies, which is why monthly management accounts should be a key consideration for any business.
By providing your business with a detailed breakdown of exactly how you are performing, management accounts allow you to set targets, foresee potential problems and shape your ideal business strategy, particularly in a changing business environment.
Naturally, a business with little knowledge of its strengths, weaknesses, and how it is performing daily will struggle to react appropriately to any unforeseen challenges which may arise. Equally, without a sufficient overview of the ins and outs of its cash flow, the business could be at risk of missing the warning signs of any problems until it is too late.
Management accounts are like a monthly “health check” for businesses – and the information they provide is crucial for keeping on top of cash flow. A strong set of management accounts should include all types of information, such as:
- Profit and loss reporting
- Balance sheets
- Cash flow statements
Incorporating cloud accounting, rather than traditional software, into your business can elevate accuracy and organisation. By automatically updating financial information and providing financial reporting in real-time, cloud accounting eliminates errors that normally arise from manual data entry.
With the upcoming Making Tax Digital (MTD) rules coming into force in April this year, real-time accounting will be an invaluable tool for ensuring that your business is compliant. Additionally, this approach allows for a flexible approach with the instant access to data making remote collaboration with your accountant even easier.
Throughout the year it is essential to monitor the performance and success of your business. Tracking Key Performance Indicators (KPIs) accounts for a vital part of this process.
Which KPIs you track may differ from other businesses, but some general financial KPIs to be aware of include:
- Revenue and turnover growth
- Sources of income
- Revenue concentration
- Profitability over time
- Working capital
For help and advice, contact our expert team today.