In this edition of Ask the Expert, financial guru Henry Ong gives us a list of things to consider in making an annual business budget. What are the main factors to consider in making an annual budget plan for my business?
The main factors that you need to consider when coming up with an annual budget are the following:
1) Historical financial statements - You need to review your financial performance for the current year and how this has affected your financial position. How do you compare your sales this year compared to last year? How did you cope with the rising costs and expenses this year? How was your pricing strategy and margin management? How did your cash flows perform as a result of your sales? You need to know these so you can establish a trend to be able to project your financials.
2) Economic environment - After reviewing your financials, the next step is to evaluate the current economic trends and how this will affect your industry. How will the expected demand for your products and services next year going to be affected by inflation, interest rates and foreign currency rates? Are there any changes in government policies that may affect the level of competition?
3) Projected financial statements - Once you have established the trends and estimates, you can incorporate these into your budget by projecting your sales and earnings for next year. It will also be helpful if you can project further by incorporating the effects of your earnings financials into your balance sheet and cash flows so you will know the amount of additional resources and capital expenditures that you may need to budget. Sometimes, you may have to look for additional financing by borrowing from bank or look for additional cash infusion from new investors.
Budgeting can be fun when you involve your management team in the process. You will not only learn so many things about your business but also discover new insights about your people and the macro economic environment.
Henry Ong, CMC, CMA, is president and COO of Business Sense, a business advisory firm that provides expert solutions to small and medium sized companies. You may reach him at email@example.com.