Page 4: Budgeting and business planning
Many businesses fail in their first year of trading. There are many reasons, but typical ones include:
- lack of understanding of the market a failure to carry out market research
- underestimating the strength of the competition
- failure to secure adequate finance
- inaccurate estimates in constructing budgets for example, revenue forecasts are too high and/or cost estimates too low.
A well-structured business plan, including budgets, can help a new business to avoid such problems.
A business plan provides a forecast of costs and revenues over the planning period. It sets out how sales will be achieved and how the business is to be financed. Banks expect to see a business plan before agreeing to any loan request. Many banks provide tools to help owners draw up business plans.
It is important for a new business to have clear budgets. A budget is based on the business objectives and identifies key factors, such as what money is needed, for what purpose and where it will come from.
A budget also considers the assumptions a business may need to make about variable factors, such as interest rate changes or volume of sales. A detailed budget plan with clear targets will help give a business control by:
- ensuring money is spent on the right activities
- drawing attention to waste or loss
- focusing on areas of the business that need review, for example, if revenue is not meeting target or if costs are rising.
A budget will also take into account expected cash flow so the business can assess if its income will cover its expenditure. Difficulty with cash flow is common. It is unlikely that a new business will make a profit in its first few months of trading. It takes time to build up a business and win new customers.
Many new businesses offer credit terms to customers so they must wait to be paid. The result is that the business is often short of cash. Barclays, like other banks, can offer support in several areas. Its business managers can:
- advise owners on ways of managing the business if debtors are slow in paying up
- give guidance on effective ways of preventing late payments
- help a business create systems for its customers to pay online, speeding up payment and leaving no room for the excuse that 'the cheque is in the post'.