A quick glance at any social media platform today will tell you that it is Back to the Future Day, the famous day that Doc Brown and Marty McFly travelled into the distant future of 21 October 2015. The blockbusting film had mixed success in its predictions of the future but how easy is it for businesses to predict the future of their finances by budgeting – and are there any benefits in preparing a budget?
Many company’s management accounts will consist of a profit and loss account and balance sheet. These are perfectly good factual statements of the results for a period and position at the end of that period, but a budget can often provide a context to these reports.
For example, a profit and loss account may show sales have increased by 2% from last quarter but does this represent a good result if management were expecting turnover to increase by 5% due to a new contract or if unexpected staff overtime has absorbed the potential profits the extra revenue was expected to be generating?
A budget can therefore provide a starting point to a discussion as to why the company finds itself in its present position and can be an indicator of problem areas within the business. If IT expenditure is constantly exceeding budgeted cost, is it time to replace some ageing IT equipment? Could under spending on staff training be linked to a recent increase in staff turnover?
Budgets are an important performance analysis tool and creating a budget allows management to give consideration to the future direction in which they wish the company to go, the best method of achieving that direction and the likely cash flow requirements.
When in use budgets can be a useful performance management tool and if done correctly can also be a motivating factor for staff, particularly if they are involved in – and in agreement with – a budget setting process that results in realistic, challenging yet achievable targets.
The great news is that many companies already have budgeting software at their disposal. Accounts packages such as Sage include built in budgeting modules, allowing anything from a simple roll forward of last year’s results to a detailed line by line analysis. More advanced budgeting software can model a profit and loss account, balance sheet and cash flow statement from a series of basic assumptions.
So whilst the future of your business is unlikely to contain hoverboards or time travelling DeLoreans, it may certainly be worth considering the direction in which your business is heading in the months and years ahead.