Tips for setting budgets

Unfortunately plenty of assumptions come into play when drawing up a budget and assumptions can often prove costly if not thought through properly. Smart Currency Business CEO Charles Purdy provides his top five tips on setting a budget for the new financial year that leaves nothing to chance:

1. Cashflow is king: The most important thing in business is to maintain a healthy cashflow. Hence your business’ budget should look not just at expenses, income streams and growth targets but also working capital and capital expenditure. Your business needs to be able to balance its incoming revenue receipts and outgoing payments schedule, which is not achievable without laying everything out to see what is coming and going when. This process may help to unearth hidden opportunities to reduce expenditure, revenue streams which are under-utilised and profit margins that may need adjustments to remain sustainable.

2. Expect the unexpected: Some costs are easier to forecast than others. Rental costs, for instance, are relatively stable on a month-by-month basis. Others can arise completely from nowhere, and often require an immediate (and potentially costly) response. A friend of mine involved in the media industry always factors in one major crisis each year and allocates funding with which to address the consequences. It could be the result of a natural disaster, terror attack or, as we have all seen, a financial crisis – which disrupts operations, involves staff travelling the world which will then cause operating costs to spike. And our specialist area is currency movements and any company that is involved in international receipts and payments needs to make sure they set a realistic budget exchange rate and then work with a currency specialist to minimise risk.

3. Maintain a sense of realism: Your budget is worthless if you are not realistic about the business’ prospects – too upbeat and you will miss your targets and face cost blowouts; overly downbeat and you cause needless stress and potentially withhold capital needed to fund areas of expansion. Take a step back to determine the sensibility of your budget, as it is all too easy to fool yourself. Factor in discrepancies across areas of the business – some will exceed expectations, and some will likely fall behind, but take a broader overview to point the business as a whole in the right direction.

4. Be inclusive: It is virtually impossible to be realistic in your budget expectations if you do not know exactly what is happening across the business. Bring in staff at all levels to elaborate on conditions in their discipline over the previous year, current market trends and their expectations for the year ahead. Such contributions when drawing up a budget will help you ensure it is realistic, achievable and comprehensive.

5. Think big AND small: Take a balanced approach to the macro and micro details. Be careful not to overlook small details within your own business operations. Chances are that by drilling down to something as everyday as office supplies, there will be ways to achieve cost reductions as well as ad hoc expenses that quickly add up. Conversely, make sure you are considering the wider operating conditions. Fluctuations in international exchange rates and oil prices, for instance, have both direct and indirect affects on your operating costs such as transport and deliveries, cost of raw materials and profitability levels – so either include significant provisions/contingencies for adverse movements in these global factors or get in place a risk management strategy which is usually best done with the help of a specialist.