Why SMEs should budget now for next financial year

Running a small business is a big job. With so many calls on your time, it’s tempting to put off bigger and less enjoyable jobs until they’re absolutely necessary. Don’t let updating your business strategy be one of those jobs. In fact, get onto it early.

If your business strategy revolves around the financial year, don’t leave your planning until June (or worse, July). Start budgeting for the next financial year two to three months early so that you can start the year with a very clear picture of where you are going. If your company works around a different business cycle — like grain growing, for example, which in Australia works on a March to February production year — you should start your forecasting three months out from that point.

Start planning early to help your business grow

Why? Planning early gives you vital time to work out your future working capital requirements and to apply for funding if you need it. If you leave funding applications to the last minute you may well not be able to get it or, if you do, you might have to pay a higher margin or interest rate on the money you borrow.

You also need to give yourself time to research any changes you would like to make in your business. For example, if you wanted to introduce a new product in the next financial year you need time to research potential suppliers, costs and payment details, and to calculate any knock-on costs, like extra wages or storage space. Not to mention questions like ‘how many of these do I have to sell to break even’?

Plan to prevent nasty tax surprises

It’s also important to plan to avoid getting unpleasant financial surprises. For example, if you are paying provisional tax, your accountant will need you to produce a 12-month forecast of probable earnings so that he can work out your liability for the next year.

It is also a good idea to know how much tax you will need to pay at the end of the financial year so that you can plan for the cash flow. If you present your accountant with your actuals to date and an updated forecast cash flow to the end of the financial year, they will be able to give you a reasonably accurate estimate of your tax bill. This will give you plenty of time to organise your cash flow around your tax payment.

Break the job up with a rolling forecast

If finding time to sit down and do a 12-month plan once a year is an overwhelming task, you can make it more manageable by breaking it down. A really good practice is to establish a rolling 13-month budget and forecast. This way instead of building budgets and forecasts 12 months at a time, you do it month-by-month. As you complete a month in the current year you build a forecast for the same month in the following year.  For example, as you are finishing March 2016 you edit or create a forecast and budget for March 2017. It also has the advantage that the month is still fresh in your mind.

A rolling forecast means you will always have a full year plan ahead of you. This is also a good opportunity to check all of the assumptions behind the forecast during the full 12 months and adjust if required. That’s important because the numbers in your budgets and forecasts should be constantly evolving as your business environment evolves and changes.

If you need help organising your financial records for both you and your financial professional, try out Reep – contact us today for more information. Reep is cash flow management software that creates budgets and forecasting for the future.