How to plan for your business (forecasts and budgets)

Why do businesses need to plan?

Business planning is an important key to the survival and growth of your business, because:

• it enables you to evaluate and control your business
• it will provide you with guidance on when to make certain business decisions
• it allows you to review your personal goals and to align your business plan with these personal goals

When is business planning most often used?

Typically, business planning is used to:

• raise money
• negotiate for premises
• plan the resourcing of businesses
• re-structure businesses when necessary to take advantage of changing opportunities

The importance of forecasts and budgets

An essential part of business planning is the use of forecasts and budgets. These should provide reasonable estimates of future sales, costs and cash balances. Preparing forecasts and budgets is a process that should not be hurried or treated casually, because the advantages of detailed planning are considerable, as discussed below.

What sorts of forecasts and budgets are needed?

All businesses should consider using forecasts and budgets that cover the following key areas:

• Cash control - You should address where the money will come from and where it will be spent. The cash-flow budget will help you to see when funds are available and when they are required, and to make sure that surplus funds aren't left idle.
• Evaluating your business operations - Each time you prepare an income statement, your actual sales and costs can be compared with those projected in your original plans. This helps you to detect areas in which your business isn't performing satisfactorily.
• Determining whether additional resources are needed - Your plans may show that a sharp increase in expected sales will overload your staff. This will prepare you for adding additional staff when the workload increases.
• Planning your purchasing requirements - Having a projection of your expected sales can permit you to take advantage of bulk discounts. Having advance knowledge of your purchasing requirements will not only save you money, it will also ensure that you have sufficient stock available when you need it and that you don't over-stock.
• Anticipating your financing needs - With a business plan, the search for necessary additional funds can begin as early as possible. This way you can more easily avoid financial crises and can arrange funds on the most favourable terms.
• Evaluating profitability - Careful planning will help you identify the most profitable activities in your business and help you avoid putting resources into unprofitable areas.