Spacer Image
Chapter 3 of 5

How budgeting and forecasting works


Table of contents

Spacer Image

Retail guides > Retailer's guide to making money > How budgeting and forecasting works

How budgeting and forecasting works

It’s never too late to start budgeting. It can provide a huge boost, even if you’ve already been in business for years. Accountants say it’s an area where many retailers fall down.

Five ways budgets make business better

Budgets and forecasts will ground your decision-making in financial reality. For example, they will help you:

  1. predict how much money you have to work with

  2. avoid running out of cash (and getting into scrapes with suppliers or banks)

  3. make plans for improving the business through reinvestment

  4. see if things are going off track and make course corrections

  5. ensure there’s enough money left over to pay you

A lot of businesses battle on without a budget, but acting on instinct can be stressful and mistake-prone. 

quote

So what is a budget, exactly?

A budget is your best guess at what will happen financially in the year to come. To build one, you’ll need to predict:

  • income and costs for the period (green side)

  • any changes to what the business owns or owes (purple side)

Short on time but want to get the most out of this guide?

Download the free ebook now

What does a business budget tell me?

A budget gives you a framework for approaching the year. Let’s take a closer look at what you will learn on each side of the budget.

On the profit-and-loss (P&L) side

You’ll learn how much it will cost to be in business for the year. That will show you how many sales you need to survive, and how many to thrive. You’ll also find out where most of your money goes – which can inspire ideas for savings.

On the balance sheet side

You will see all the big-picture things for the year ahead like how much debt you’ll end up with, how many assets you will have acquired, and how much profit you expect to bank. In short, the projected balance sheet will tell you if the business is growing or shrinking in value.

What you personally make

Business owners are encouraged to pay themselves a wage, and list that as a cost on the P&L. They can also pay themselves a dividend when profits are finalised at year end. A budget allows you to set a workable wage, and predict your dividend. That’s better than living hand to mouth.

How to create a budget

Coming up with the numbers is easy enough if you’re already in business. Use last year as a guide and create a few versions of the budget – some optimistic and some less so. 

Budgeting is trickier for new businesses, but you have to start somewhere. Again, create several versions of the budget to account for a wide range of scenarios. Accountants and bookkeepers can be a big help. Many will have seen a business like yours before, so they'll offer good insights. You could also check your numbers with someone who has retail experience. They may be able to spot bad assumptions or missed costs.

You can find retail budget templates on the internet and simply fill out the rows and columns. But if you use online accounting software, set your budget up there. It will allow you to check your budget against real-life financial data on a daily, weekly, and monthly basis.

A cash flow forecast is handy, too

While a budget predicts how much money will come and go, a cash flow forecast predicts when it will come and go. That’s important to know because there will probably be times when you run low.

The good news is that you can manage your way through cash shortages by delaying spending, negotiating longer payment terms with suppliers, getting finance, or calling on savings. But all these things take planning. You first need to know when a crunch is coming. That’s what a cash flow forecast does.

graph

By plotting when money will come and go on a timeline, you’ll see when your cash reserves will get low.

Chapter 4: Staying on top of the numbers

Retailers are like hawks when it comes to watching sales, and that’s a good thing. There’s no money without them.

Read chapter 4

chaptered-guide-cover

Download the ebook

Everything you need to know about making money in a retail business in one handy printable guide.

Thanks! You'll receive an email shortly with the ebook link.