Budgeting And Forecasting For Start-Ups

What Are Budgets and Forecasts?
They are predictions of future income and expenses and cash flow. They also predict future performance with financial forecasts and projections and with financial models.

Why Budget and Forecast?
Budgets and forecasts provide a feasibility analysis. They can help develop a business model, review your key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of your business to investors and lenders. Budgets and forecasts can also be used as a management tool. They can help you establish milestones and require accountability for accomplishing the milestones. They can help identify risks and show benchmarks. This will help the small business owner make the necessary adjustments to avoid the risks, to reach the milestones, and to measure up to benchmarks.

Why Are Forecast Important?
A forecast can establish measurements to guide management, to facilitate planning, and to facilitate goal-setting.

What Areas Do You Need to Forecast?
It is critical that you forecast your start-up costs so that you know how much it will cost to open your doors. You need to prepare estimated start-up financial statements and estimated short and long-term revenue forecasts. As part of your forecasts, you will review key concepts and issues that will make a difference in your company’s survival. You also need to forecast the resources you will need and set up a schedule for using and replenishing your resources.

Do Investors Want to See Forecasts?
Yes, your forecasts will show investors that you know your business, that you are likely to succeed, and that you will make wise use of their money. You must have at least a five-year forecast that shows significant profit by year five, significant net income by year two, and that investors will earn approximately 10% return on their investment.

Do Lenders Want to See Forecasts?
Yes, your forecasts will show lenders that you know your business and the you will be able to repay the loan. Be sure you forecast for the entire period of the loan and use conservative financial ratios, because the lenders will. Also, you will need to collateralize and personally guarantee the loan.

The investors and lenders will want to see forecasts of your profit and loss and revenue. They will also want to see what drives income in your industry; for example, sales, distribution, advertising, internet search engines, referrals, location, price, or coupons or other discounts. You also must forecast the revenue cycle for your target customer. How much time will you need to start production, and how quickly will your product or service be accepted in the market?

What Other Forecasts Are Needed?
Another important forecast is the total personnel required to support your desired revenue. If your revenues result from sales, you should start with the desired revenue in year 5. From year 5 subtract 40% from each prior year. On the basis of your research, estimate the number of sales each sales person will make each year. From that you can calculate number of salespeople required.

After you make your forecasts, you should complete a sensitivity analysis by adjusting each major item estimated by 10% plus or minus. Examine the impact on revenues, profit, and cash needs. Remember that most operating expenses are roughly proportional to personnel headcount. These are your variable expenses such as salaries, benefits, employment taxes, furniture, computers, rent, supplies, utilities, training, travel, meals, training, and dues. Other non-variable expenses may or may not be proportional such as professional services, subcontractors, advertising, and trade shows. Use your forecasts to compare yourself to others in your industry by such things as revenue per employee, revenue per salesperson, gross margin, expense categories as a percentage of revenues, financial ratios, and inventory control. It is critical that you know your industry’s benchmarks and metrics and that your business forecasts are within these benchmarks and metrics. You can find this information by researching your industry.

Should You Hire a Business Consultant to Prepare Your Forecasts and Research Your Industry?
Yes! Unless you have a very strong finance and accounting background, you cannot create financials that will be acceptable to investors and lenders. You cannot do an acceptable business plan with a spreadsheet, and it will be difficult for your to be objective in developing your business model. Also, you are the entrepreneur and your efforts are better spent building and developing your business which is what you do best.

Capital Gains

In addition, from 6 April 2008, to complement these CGT changes, an entrepreneurs' relief is being introduced which will be available when an individual sells their business. This means that the first £1,000,000 will be charged to tax at 10% and gains in excess of the £1,000,000 limit will be charged to CGT at 18%.

The Treasury has announced that it doesn't see the need for a change to the taxation of insurance bonds as a result of the CGT changes. As a result, a policyholder is still subject to income tax at their marginal rate of tax on the event of a chargeable event gain.

Analysis

Even though the 18% flat rate of CGT, which would apply to collectives, looks more attractive than a potential income tax charge at 40% on a chargeable event gain with a bond, there are other factors to consider.

There would also be an annual income tax charge to consider on the dividend/interest distributions from collectives even if this is accumulated which would be 32.5%/40% in the case of a higher rate taxpayer. Investment bonds offer the policyholder tax deferral in that clients can access money through the 5% tax deferred allowance, without incurring an annual income tax charge.

Bonds are self-assessment friendly, as withdrawals within the 5% tax deferred allowance don't need to go on the tax return. Only chargeable event gains need to be put on the tax return.

Withdrawals within the 5% tax deferred allowance don't affect a client's entitlement to age allowance.

Investment bond holdings may be deemed excepted assets for means testing.

IHT planning - bonds are ideal assets for trustees to hold due to the administrative simplicity they offer. If trustees hold collectives, then they will have to consider the completion of annual tax returns and the associated professional costs.

It makes sense for everyone to have all policies and investments reviewed by an independent financial adviser to ensure that the charges are fair and the underlying investment performance is at least as good as the average performing funds. The consequences of not doing this can be extremely costly.

Unconventional Budgeting

Budgeting in a small business is a neglected area. It is only when business plans are required that the business owner will prepare a cash flow forecast or budget.

Most businesses divorce the budget from the cash flow forecast. In fact, the cash flow forecast is only furnished when requested by the bank in most cases. Businesses have yet to learn that the cash flow forecast is a valuable tool for analyzing internal finances.

Collapse a budget and cash flow forecast into ONE. And allow the cash flow forecast to serve as your business's financial map, for the next 12 months. Budgets are vigorously implemented, only when a business starts shedding cash. And major expenses are cut, drastically, when the owners and their accountants draw up budgets.

A budget will target, run away expenses, in an attempt to bring it under control. The main expenses to normally go would be staff costs (lay offs), insurance, advertising and stationery. Telephones are barred and transports costs are reduced radically. So the budget is expense focused.

Furthermore, if a budget was drawn up for previous years, it is highly likely that, sales could have been too optimistic, and cognizance was not taken of credit sales and its impact on cash flow. Hence my departure from accepted practice, and proposing combined cash flow and budget.

Overheads/ Cash outflow

I concede, that high overheads, is a killer for many small businesses. But the obsession with overheads is not going to save your business. You in business to grow sales and not to be bogged down by high overheads! If phone calls are barred, or the advertising budget is slashed, more problems would be created, than solved. Evaluate carefully if an expense is linked to business growth, and think twice, before slashing that expense. Say you incur an advertising cost of $ 10 000.00 per year, and it can be proven that it brings in $ 20 000.00 in revenue. Reducing the budgeted amount by $5000 will affect sales adversely. If revenue is down, increase the advertising budget. If you lack skills, budget for more, not less, employees. And increase the telephone budgeted amount, you need that phone, to call more prospects. Of course, weak advertising campaigns, unproductive calls, and lazy staff cannot be entertained. Budget accordingly, but be very analytical in your approach.

Cash Inflow

Very little emphasis is placed on the cash income component, in a forecast. The cash inflow is only relevant in relation to how it affects cash outflow. If the inflow is too low, an adjustment is made to outflow. Rather remain focused on how cash inflow can be boosted as opposed to reducing outflows. Be optimistic about your cash inflows, not your revenues.

Don't project for expected revenues, project for cash revenues, deposits, advances, sale of assets, based on current trends. A picture will begin to emerge of what your true cash requirements truly are in the business. If the report reveals that limited cash resources would be available, it means that more creative methods should be devised to increase cash flow, not radical reductions in cash outflows!

It might seem foolish to spend more on certain expenses, when cash flow is slow, but panic and fear is your worst enemy in a time of crisis.

If businesses don't grow, they contract and die. The quickest way to shrink is to radically reduce important overheads.

Most businesses that reduce overheads, drastically, continue to remain stuck in a cash flow crisis! Energy (cash)flows where attention goes...

Capital Budget - 6 Steps To Building A Better

Understanding how organizational priorities translate to capital projects and to budget line items requires an objective, quantitative data-driven that aligns project criteria with strategic business goals and objectives. How will your organization determine which capital projects to fund next year? How will you determine the priority of needs? And when the inevitable unanticipated requirement arises - be it an emergency equipment replacement or a new management mandate - how will you determine the impact on the budget?

Most organizations struggle with questions such as these as they undertake the process of developing capital plans and budgets. Despite their best efforts to make this process objective and transparent, in reality, it can often be highly subjective and political. In some cases, high-profile projects may garner the lion's share of funding. In others, the "squeaky wheel" gets the grease, possibly at the expense of greater overall organizational priorities.

Understanding how organizational priorities translate to capital projects and to budget line items requires an objective, data-driven process that aligns project criteria with strategic business goals and objectives. It also requires a process flexible enough to adapt to the inevitable mid-course corrections and unplanned spending needs that arise over the course of the year.

Making Your Capital Budget Bullet-Proof

The six-step process below, which VFA employs with its clients, helps organizations create consensus about overall business values and priorities, use these to rate the value of capital projects, and ultimately creation of capital budgets that deliver the greatest business value.

A prerequisite to this process is accurate and complete data about the current condition and the renewal and maintenance requirements of your organization's capital assets. Your budget depends on the quality and integrity of this data. This information may be collected by your own facility personnel, outside assessors or a combination of both. But everyone should employ consistent methodology for gathering this data. All stakeholders should also have some level of access to this data through a centralized database, along with the tools to analyze requirements and estimate funding needs, promoting accurate "bottom up" budget projections.

• Step 1: Establish a Team

Define a core group responsible for establishing key goals, objectives and responsibilities. The team will typically include representatives from Finance, Facilities, Operations and Executive Management. Depending on your organization, it may also include representatives from each line of business or each region.

• Step 2: Create a Common Understanding

The members of your budget team will have different backgrounds, skills sets and perspectives on the capital planning process. Provide them with "basic training" in the language of capital assets, including assessment terminology, asset and requirement categorization methods, cost estimation techniques, key performance metrics and how they are calculated, and requirements for various funding sources.

• Step 3: Identify Evaluation Criteria

With organizational goals and priorities clearly in mind, the group should determine the specific criteria that will be used to evaluate requirements and to assigned priorities. These may include such factors as building use, building system, requirement category, current facility condition, and the impact of remediation on the facility condition index. For example, one municipal government identified life and safety issues as the top priority in evaluating capital requirements.

• Step 4: Prioritize Projects

With prioritization criteria established, the team can begin ranking facility requirements based on business importance factors. VFA often uses the pair-wise comparison method to simplify the choices clients face in prioritizing projects. Pair-wise comparison rates factors such as Urgency, FCI Score, Category, System Type, and Building Use, and then ranks and weights those items as a basis for prioritizing capital projects. This method may also be used to prioritize items within a category, for example, comparing and ranking different types of building uses, from administration to classroom to research. The capital budget is then based on the rankings and weighted scores from the pair-wise comparisons.

• Step 5: Create the Budget

With a ranked list of projects in place, the capital budget process boils down to where your organization "draws the line" for funding. Invariably, there will not be enough to cover all your capital improvement projects. With a ranked list of projects by priority, it is easy to see what the current funding level will address, and what will be deferred till the next budget cycle.

• Step 6: Communicate the Plan

The capital budgeting process invariably requires defending that budget to decision-makers. By following an objective, data-driven process, you can communicate the rationale for budget decisions, down to the specific requirement level, and demonstrate the impact of different funding levels to the CEO, CFO, board of directors, and other key stakeholders. You can also readily communicate the impact of changes that may occur over the course of the year, and how they impact current capital projects.

By basing your capital budget on overall organizational priorities, quantifying those priorities, and consistently applying them to your capital projects, your organization can ensure that the squeaky wheel won't drive derail your capital strategy, and that capital investments it chooses will add the greatest possible business value and support organizational objectives today and in the future.

Estimating The Financial Position

Budgeting involves the planned allocation of funds to various departments in a business organization. Budgeting is often done by enterprises on a periodic basis. In simpler terms, it means planning for and estimating the financial position of an organization in a given time period.

The process of budgeting is very basic. Budgeting helps keep track of the health of a business, be it big or small. An individual with a basic income can also plan his budget. A simple rule for making a financial statement is keeping the accounts very simple. The expenses can be noted on a day-to-day basis; these expenses can be clubbed under one subcategory.

The usefulness of a budget depends on the reliability of the information used to create it. Unrealistic estimates of prices, yields, or input quantities would lessen the accuracy of the budget and could possibly lead to a faulty financial decision.

The process of budgeting can help make sound management decisions in any organization, if the information used for making the statement is reliable. If the process is undertaken on a one-year cycle, one should plan the next budget at least three months prior to the end of the current one. If the budgeting is for much shorter periods, for instance one month, one should begin preparing next month’s budget within one to two weeks prior to the start date.

As per business terminologies there are six broad types of budgets made by enterprises, namely, sales budget, production budget, material purchase budget, staff budget, overheads budget, and capital expenditure budget.

Most organizations use structured planning to yield maximum results in key areas, including return-on sales, revenue growth, asset management and equity. Many businesses carry out the process almost on a daily basis, and include the majority of the activities associated with business planning, such as growth areas, competitors, cash flow and profit.

One of the prime benefits of carrying out annual business planning is that it gives organizations the opportunity to understand the performance, and also helps in realizing the factors affecting it. It also helps to make continuous improvements and anticipate problems, and offers sound financial information on which to base decisions, improved clarity and focus.