Wise Accounts Blog

A budget sounds very professional to some while others dismiss it as a crystal ball exercise. Is it yesterday's method still taught at school and totally irrelevant in today's world?

A budget is better than no budget at all - but don't be fooled, it will invite challenge from all angles.

The assumption is that you can plan the next twelve months ahead with a statement of expected income and expenses and stick to it no matter what. The old rule was to glance at last year's profit and loss statement and bump everything by 10% if you were conservative or by 20% if you were part of the upcoming new wave of management. Of course if last year's was a loss you would be fired if planning to increase that loss next year also...

Budgeting completely lack any value in charting ahead your future cash flow. It simply assumes things will merrily roll on as usual.

A slight improvement would be to compare last year's performance with the year before that. Coming up with some sensible explanation of what happened would help identify the areas of strength and the areas of risk.

Unfortunately what happened 12 and 24 months ago is too far behind in some industries to be any gauge of what to expect in the future.

There are two things you can do to remedy this situation: 1- change your timeframe, 2- use a dynamic approach.

If you use a monthly trial balance you will see that both income streams and expenses are not well behaved monthly averages but come in bumps and flats. If you can pick a trend developing then incorporate that into your budget.

Instead of comparing 12 months at a time, what about making a budget for the next 6 or 3 months only? Chances are it will be more realistic and you can save your credibility by offering a revision at the end of that timeframe. Then the latter part of the year will take care of itself when we get there.

The dynamic approach requires some spreadsheet work. You need to work out a calendar and tally all weekly, monthly and quarterly expenses and receipts and log them into the future. For each date in the future you can calculate what the cash flow will be like. Will you need some bridging loan or will you have extra cash to set aside for a rainy day?

For an oline cash flow and bookkeeping service click here

For a time billing and invoicing online system click here

Add Comment