BDO partner Dylan Byrne urges businesses to be proactive with budgeting and forecasting

BDO businesses services partner Dylan Byrne has urged companies to be proactive with budgeting and forecasting to ensure they’ll be able to navigate future economic choppy waters.

Many businesses are feeling the pressure of rising costs and competition for talent, meaning every dollar counts. This raises the question – do you have a thorough understanding of your current business position?

Don’t wait until you’re in the thick of a financial crisis to evaluate your current `state of play’. It’s always best to be proactive with budgeting and forecasting so that if challenging situations occur, you’re well prepared. Not only will this reduce your stress as a business owner but will ensure the business has enough cash to meet financial obligations and continue to grow.

Through my experience with clients over the years, there are typically three common challenge areas when it comes to effective business forecasting – the forecasts don’t adequately address business risks, business assumptions are poorly documented and management information packs are not fit-for-purpose. These factors together make it increasingly difficult to have robust business performance discussions or to effectively evaluate cashflow requirements.

So, what forecasting practices can you employ to set your business up for success in the new financial year?

The first step is to start from the bottom up and learn how much money you need to keep your organisation going. Don’t assume anything – seek to understand all aspects of the business including your business cycle. Are you a seasonal or cyclical business? Do you have boom times and/or quiet times during the year? Do you have customers who are slow to pay?

From there, you can begin to review and quantify your income streams. What drives your revenue? Is it the sale of products or your services in terms of hours charged? Do you charge fixed prices or are they variable?

Understanding these elements will help you to manage cash flow, avoid common cash flow mistakes and learn what levers you can pull to stretch cash flow further.

Next review and quantify your direct costs and your operating expenses and thoroughly understand the factors that determine the value of your costs. This includes understanding variable costs which fluctuate with your revenue verse fixed costs or overheads which are more consistent, regardless of the sales for the month.

Lastly, set realistic targets to account for change ensuring your budget is achievable but ‘stretchy’. At the end of the day, this will help your team to buy into the budget and take accountability for it.

Dylan Byrne is a business services partner at BDO in Australia.