Forecasting and Budgeting is absent in many small and medium enterprises (SME). A lot of SMEs understand the need to do this and its absence makes them anxious; but they do not know how to set about doing this.
The first place to start is in understanding cash flow. I say this, because many times in the very short term, this is more urgent than understanding profits. Take a look at how much expenses you incur every month. Be complete and categorize it under conventional headings – Salaries, Rent, Office expenses, Bank loans and Interest. Break this down weekly. Do the same for Sales and monies you expect to collect from AR. Again, do this weekly. The weekly cycle is important to understand; as timing of when you receive your cash is as important, as how much. If a bill is due this week and you will only receive monies next week, it still means you have to scramble. Once you do a cash flow on a weekly basis for the next three months, a business will be able to see what regular patterns emerge. They can take action in advance. They must update this forecast weekly, filtering in new information and make it a rolling forecast – that is, it keeps going forward, always looking at three months ahead.
The next is to do a budget for your business – most take this to mean a Profit & Loss forecast that shows Sales & Expenses. This is only half the picture! (Even less!). You need to know the Assets & Liabilities and how they change, which comes in a forecasted balance Sheet and a Cash flow statement (not to be confused with the weekly cash flow). When you can forecast for 12 months at a time, the patterns and any seasonality of your business emerge. A business must live in the now and future, as opposed to the past. A forecast enables you to do that. It is important to do this formally; that is according to good business and accounting principles. Know your key assumptions that go into this and periodically test their validity. Update this and the forecast on a quarterly basis. To make this a living working document, make the look and feel of the forecast the same as your regular financials. This will mean there is no confusion in the ranks and you are encouraging managers to look at the past and future in a seamless manner.