Wise Accounts Blog

Do you control what the price of oil will be tomorrow? Can you secure your future income? Will the people who use your labour or expertise be around tomorrow, and the day after?

Sorry to disappoint you but the only people who do not have to take any risk are those who have passed away...

By the same token it is quite wise to save for a rainy day - but how long do you think the deluge will last? Noah was prepared to stick it out for forty days. Yet he and the passengers on his boat were the only ones to survive.

If a profit/loss and balance sheet are financial statements to account for what occurred in the past, a budget is a financial assumption of what you would like to achieve in the future.

You might ask yourself what is the difference between faith, presumption and wishful thinking? Unless you have some deep insight into your market and the dynamics of your industry you have no business claiming you will achieve this or that. Yet shareholders and creditors demand to see how prepared you are for the next 12 months ahead...

Just like a hot tip from a person too close to the action is considered insider trading - bragging about your future plans may alert your competitors to make their pre-emptive move and cut you in on your lofty plan.

Some people have the view that by and large things will continue to roll-on as usual. To them preparing a budget consist of taking last year's results and slapping 10% onto everything - claiming we are aiming at a 10% growth this year... nobody got fired for that! So they think.

A smarter approach is divide and conquer. Instead of aiming at 12 months ahead just look at what might happened for the next 3 or 6 months and repeat the process 4 times or twice a year. People get paid fortnightly or monthly - not yearly. Why should you be held to make a fool of yourself with a crystal ball when a smaller time span limits the risk of being out of touch?

Unless your company is a one pony show chances are different divisions perform independently. Why not create a strategic budget for each and then consolidate the whole? More work? Yes. Why do you think spreadsheets were invented?

Finally you could dynamically project into the future your regular income and expenses and come up with a cash flow forecast graph - plotting your future cash position for the next 90 days.

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