As accountants for many businesses in Manchester and Warrington, we are seeing more requests for forecasts from banks and insurance so planning and budgeting are not only useful to business owners but also if you are looking for finance or thinking of expanding your business.
Start with identifying your costs
First look at your fixed costs - the things that you can be certain of such as premises, staff costs, raw materials, light, heat, electricity, IT, etc. Then, turn your focus to the longer-term aspects of your budget with an analysis of existing strategic or capital spending plans. This is really easy to do if you have accounting software for your business such as Xero with solid information at your fingertips to get a cashflow started.
Calculate your budget using new data, not historical projections. Budgets may have been squeezed in the past 20 months and may not reflect the current or predicted market trends.
Apply the stress-test
In uncertain times, it is important to be pragmatic. Create 3 scenarios for your budget – high, medium and low. Start with the medium scenario – the “expected” outcome and from there you can derive variations on whether things turn out better (high) or worse (low). Some examples of questions to ask yourself include:
- What if your sales don’t grow next year?
- What if your annuity income falls because 10% of your customers leave and go to another provider?
- How does this affect the profitability of the firm?
Build realistic income models. Ensure you provide for bad debts and write offs in each of your high, medium and low scenarios. Scenario-based budgeting is not intended to predict exact outcomes. Instead, it helps the management of the business to understand the likely variances and prepare accordingly.
FUTRLI Predict
At LWA, we’ve helped a lot of our clients get through the pandemic as Certified Advisors for FUTRLI Predict – our team has access to vital tools and technology that could ensure your business survives through the fluctuating economy. FUTRLI Predict provides you with an early warning system by pulling through your existing transactions and balances from Xero or QuickBooks Online and analysing it within a matter of hours, rather than days.
Income and expenditure in 2022
Hold back some spending centrally as a contingency. This builds some flexibility into the budget so that the business can react to changing circumstances as the year progresses.
Cash is king and in uncertain times every business must focus on getting cash in on a monthly or even weekly basis. Billing cycles and cash collection management should be at the top of the agenda for the management team and offering extended payment terms to customers should be avoided as much as possible.
Could you implement a price increase?
The current business environment is incredibly competitive but as we emerge from the pandemic, consumer demand is increasing, and many sectors have seen labour and material costs rise. As demand increases and levels of supply fall, businesses have an opportunity to increase their prices. Consider the points below before implementing a price increase – even a small increase of 5% could have a huge positive impact on your turnover.
- Study the competition - Have your key competitors increased their prices recently? If so, your customers will be more amenable to the change. However, if you are the only firm pushing your prices up, you will need to offer something unique in order to justify it.
- Be open about your price increase - Tell your customers what you are doing. Avoid language like “updated price” or “adjustments to our pricing model.” Just be honest and authentic – after all, customers want to buy products and services from businesses that are open and honest.
- Explain the reasons for the increase - You don’t have to go into detail about profit margins or unit costs. Simply share the basic information. For example, “We are now going to deliver your product / service directly to your front door, and as a result, we will be raising our prices from next quarter.”
- Don’t apologise for increasing your prices - this will just invite your customers to negotiate. Focus on the benefits that the customer gets from buying your product or service. Maybe you offer something faster, better or with unique features?
- You win some, you lose some - Some price-sensitive customers may choose to go to another supplier, but any new customers will be more profitable as those new customers may be willing and able to pay a higher price for a better quality product or service.
Plan to succeed with LWA and FUTLRI Predict
Build all of the above principles into your budget and ensure you keep adequate reserves in case you encounter headwinds during the year ahead. With some support from our team at LWA, and tools such as FUTRLI Predict, you should be off to a great start for a successful year.
LWA clients will need to be set up on Xero before benefitting from FUTRLI Predict software combination, so contact our in-house Client Digital Support expert, Bradley Allen-McKenna by email to bradley@lwaltd.com, or you can call 01925 830 830. It takes minutes to get set up on Xero and you will immediately see the positive impact on your business. If you’re already set up on Xero then you can start benefitting from the amazing software that is FUTRLI Predict. Simply email Matthew Jones via matt@lwaltd.com or call 0161 905 1801 to speak to Matt about any queries or signing up.