Annual financial planning

Planning is all-important in business. By planning for the future, a business can focus on how best to boost profit margins, to manage costs and to set achievable, realistic targets for growth.

On-going planning enables a business to identify potential problems before they arrive, to highlight areas where improvement can be made and to detail the level of financial information needed to make coherent, short- and longer-term decisions.

Many businesses chose to produce a development plan once a year.

Plan

The plan should cover: an overview of how the market looks likely to evolve and how customer needs are likely to change; aims for the coming year; an identification of opportunities; possible problems; changes to the way the business operates; an assessment of the staff and skill levels; a financial forecast; and areas where investment is needed.

An effective plan will allow the business to compare the performance of the past year - including both its successes and shortcomings - with its ambitions for the year to come.

In doing so the business will be able to allocate resources, control expenditure and to calculate an accurate budget for the next 12 months.

Budget

A business budget will set out exactly where a business needs to, or can afford to, spend its money according to its plan.

It will tell a business how its finances can be managed; how projects can be funded; and how its development can be supported.

A budget must be realistic; that is, it must be based on the income that the business will generate and the sums, after meeting costs have been taken into account, available for fulfilling the business plan.

For this reason, it should include the estimated sales for the period covered by the plan; fixed overheads; the actual, variable costs of the product or service (materials, outsourcing); capital costs (investment in new plant or equipment); and, from these, profit margins.

Wherever possible the budget should build on information about income and expenditure from the previous year as this will provide a realistic basis for estimating probable future costs.

Key to an effective yearly budget is its ability to predict cash flow. For this reason it should be reviewed on a regular basis to make sure that short-term targets are being met.

Once the budget has been drawn up, it affords the opportunity to investigate whether any of the costs can be reduced or better managed.

There is no reason why a business should limit itself to one overall budget that covers the running of operations; it may make more sense to draw up a series of separate budgets that cover such individual areas as marketing, product development and personnel.

Any inconsistencies in the budget - between, say, sales income and costs - will highlight possible problem areas that may arise during the coming year.

By updating and reviewing the budget on a monthly basis, a business can compare the figures set out in the budget with actual income and expenditure. Gaps and shortfalls will enable the business more easily to examine the causes of any discrepancies: a downturn in the market, ineffective advertising, a dip in the quality of the product or service, sales targets that were set either to low or too high, or changes in costs.

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