Budgeting for the year ahead
Posted on 20th December 2018
At the end of the year it seems almost too premature to start thinking about the next year before we’ve even got Christmas and New Year’s Eve out of the way. But the Christmas period often gives people some much needed downtime to reflect and start to plan ahead for their goals and achievements for the forthcoming year.
So preferably before that 2nd glasses of wine why not take some time to think what is it you want from the next 12 months. Budgeting is not just about financial figures, but also determining your goals and what you need to do to achieving them.
First take stock of last year
Look at your financials, but also look at the achievements, what went wrong, what could you have done differently and what worked for you.
The next step
With what has happened fresh in your mind you can start to plan your objectives for the new year. This could be as simple as saying keep expensive fairly constant and increasing turnover by 10%. But you can make this as detailed as you want – The more you put in the more you get out.
Let’s look at an example.
Last year you had a client that accounted for 50% of your income and you are a little nervous that you are over exposed. Your goal next year may be that you want to get that down to 40%. By looking at the sales from last year you determine that you need to either increase turnover from other clients by 10% or you need new business to cover the shortfall from working less with your “main” client. This may lead you to think that there is just not enough hours in the day to carry this out so your next goal is to take someone on to help. But can you afford this?
Now you have very good idea of where you want to go and what you need to do to get there. This is where you can now set about creating a budget to see what you need to do in accounting terms and can you afford it. Remember, a budget is just an estimate. It has to be realistic, achievable but can also be changed. Taking on 50 people next year is shown unreasonable by the budget – let’s go for 1 and see what effect that has.
Using the current year as a starting point you start to build a monthly picture of what your expected income would be and what your costs are likely to be.
A simple spreadsheet showing monthly income less costs to get a monthly profit may be all you need. But for it to give you more detailed guidance you could include cashflows, the make up of the costs, what effect does your drawings have on the profit, tax estimates including VAT and Corporation Tax – and if you wanted to really plan, “What if” effects (what happens if something changes).
We are not finished there
A lot of people think great, I’ve created a budget. Roll on next year when I will create another budget.
But for the budget to be any use you need to revisit it regularly. It is only by comparing what you actually do to what you thought you would do that it has any added value to you. You can then change course or change the budget to keep you on track of achieving your goals that you set.
Holmes and Company
This is only a very brief guide and gives you some pointers to start the process. If you would like to talk in more detail or need help putting together a budget then why not contact us. We have the tools and knowledge to help create the budget, but also question its reasonableness. The biggest mistake you can make is putting together a budget that is totally unachievable and then getting disheartened when you never achieve it. This is worse than having no budget in my eyes.
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