“How’s your business doing?”
As a small business owner, you hear this question all the time. And chances are your answer would be something like, “Great. I'm so busy”.
But are you telling the truth? Sure, you’re busy. Nearly all business owners are. But do you really know how your business is doing?
Budgets — The two types of Budget you need
When someone asks, "How's your business doing?", how can you answer without having a system in place with your financial goals?
You should develop two separate budgets:
- one for the next 12 months
- another for the next 3-5 years.
Once you have signed off on your agreed 12-month budget, it should remain unchanged throughout that financial year. Review it—and your 3-5 year budget—annually for a reality check when you’re planning for the coming financial year.
Short-term forecast — Why a budget alone is not enough
A short-term forecast is one of the most crucial tools we use to run our business. Unlike a budget, which doesn’t change, a forecast changes throughout the year.
When creating a forecast, you need to consider three things:
- What just happened?
- What do I think will happen?
- Why do I believe this?
A solid bookkeeping system should give you the actual results. You need to have a decent handle on your sales and expenses. With that information you simply think about anything out of the ordinary and create a forecast. And it will probably be more accurate than your budget because it is more short-term and easier to predict.
Comparisons — The key to keeping your business on track
This is the last step, and the one most crucial to understanding how your business is doing. As your day-to-day business unfolds, you should compare your actual performance against your expected results. While ‘budget vs actual’ is a great way to measure your performance, ‘forecast vs actual’ is typically more accurate because it’s more of a short-term expectation. It lets you highlight potential issues early, and helps you make the necessary adjustments to stay on track.
So, how is business?
Are there big fluctuations in your ‘budget vs actual’? Or are you staying on track?
Are you exceeding (or at least keeping up with) your forecast? If not, can you explain why? Are you okay with it? Do you still feel confident about where your business is going?
By using your budgets, forecasts and up-to-date actual financials, you’ll be answering that "How's your business doing?" question with a lot more confidence. Because you’ll be basing your answer on real data—not just a feeling.