We have invited an accountant, Ravi Rudra, to provide topics/insights on accounting issues particularly relevant to the smaller business operator and hope to have him provide a couple of issues of the newsletter each year. We expect that Ravi's editorial will eventually assist small business operators to be better informed on the accounting issues relating to the management of employees.
Ravi specializes in providing accounting support and services to Small Businesses, Service Stations and Charitable Trusts and therefore has an affinity with the problems faced by many small business operators.
Here is the first of his topics.
BUSINESS BUDGETS
A business is an organised method of producing revenues routinely over a period of time.
Nearly 60% of small and medium sized business collapse due to cash flow crisis. For many small business owners, budgeting involves taking last year's figures, entering them in a computer, and adding 5 percent to arrive at this year's projected budget.
However the budget is a business fundamental, especially if a company intends to grow. It is the primary control tool that a business uses to:
- Monitor progress (revenue, expenses, volumes, margins, etc) during the year.
- Control working capital.
- Control cash flow
The budget sets out in financial terms the owner's / management's vision of how the company should develop in the short to medium term and is a vital defence against bankruptcy.
Basics of Budgeting
The logical starting point for the process is the prediction of your future sales. The value of your future sales is crucial as it affects costs, profits and cash flow.
Next estimate your associated business expenses, remembering both fixed costs (such as rent) those that vary with production and sales volume.
Using these figures, build a monthly profit and loss (P&L) account. All the items that appear in a normal P&L should be covered in the budget, not forgetting GST, a common, a common omission. It is important to take into account seasonal effects on sales (e.g. during winter months) in doing the monthly phasing of the budgets. It is always good to keep notes on your assumptions and workings in case you need to refer back to it at a later period.
Assumptions about sales, purchases and expenses will affect figures for debtors and creditors.
Therefore, a balance sheet should be prepared after the P&L, not the other way around. The balance sheet provides reassurance that the figures add up correctly. However, there is little point worrying about the exact week or month a payment is due, certainly for smaller items. Finally, feed the figures through to a monthly cash flow statement to make sure that the company can pay its bills. For this the terms of both receipts (from debtors) and payments (to creditors) needs to be established carefully.
The importance of cash flow, including working capital, will be covered in the next issue.
Contact Details
Ravi Rudra & Associates Limited specialises in providing detailed budgeting, accounting and financial advice to Small Businesses, Service Stations and Charitable Trusts.
Ravi Rudra can be contacted via e-mail on RaviRudra@xtra.co.nz
Tel (09) 537 6323
Fax (09) 537 8055
