Budgeting and forecasting – Still useful management tools
Having cash in your business gives you the ability or confidence to make important decisions and provides you with a sense of security when you go to sleep at night.
There is no doubt that cash is the oxygen of your business and, commonly enough, when it comes to tax time, we always ask, ‘If I made profit this year, where did it all go?’
The usual approach is to prepare a cash flow to summarise the inflows and outflows for the period.
However, this uses the information of the past to tell you where the money was spent.
The smarter approach is to plan ahead and avoid asking that question by preparing a budget and forecast.
As accountants, we don’t see business owners take the time to plan for the year as they are busy putting out the fires in the business to keep the cogs moving.
We work with many businesses — both pharmacies and non-pharmacies — and the budget and cashflow forecasts are probably the simplest, yet least utilised management tool.
Investing time in preparing a budget helps you become an informed business owner. It also has many benefits and most of all it can be simple.
What are the benefits of budgeting and forecasting?
It gives you control over your money.
Don’t let your money control you.
Reviewing the expenses in the pharmacy line by line makes you reflect and make conscientious decisions on how your money is spent and where it is going.
You may identify unnecessary spending, like fines and late interest payments.
After doing this exercise, don’t be surprised if you have already increased the profits of the business.
It sets goals.
Whether your goal is to increase profitability or improve business value, it allows you to strive for something and keeps you focused.
It may be worth having your pharmacy manager and other team members involved in this process.
If they can understand that keeping to these goals will improve profitability, which is then linked perhaps to an incentive scheme of some sort, this gives them something to work toward.
Most importantly, not only does it add a level of accountability, but this inclusion will empower them so they see themselves as valuable team members.
It provides you with early warning signs.
By projecting out into the next 12 months, you are able to predict your shortfalls and hence, most importantly, you are aware and can get prepared for that.
For example, you may have planned to purchase a new dispensary robot and you are required to put a deposit down before bank funding has been approved.
You will be able to account for that and see how that outlay of cash will affect the business.
Another example is PBS reforms. You can predict how the next price change will affect your bottom line so you can be proactive in looking into other sources of income, such as professional services.
It gives you the ability to make important decisions.
Can I take on new debt? Can I buy new equipment or do that refit? What are the benefits that will flow from these decisions to offset the costs?
But don’t get caught out …
Be realistic in your targets and goal setting.
You know your pharmacy best, you know what your gross margin is, what stock levels you require to maintain your sales and patients, the number and type of staff you need to operate the pharmacy.
Don’t be drastic in your cost cuts and use benchmarks to help keep your spending on track.
The Guild Digest is still a valuable tool to reference in this exercise if you are unable to get hold of industry data from your accountant.
Use the most recent data.
Most budgets will project out into the next 12 months. Always use the most recent/latest results as your foundation to ensure you prepare a more relevant budget.
Keep it simple.
The first time is always the hardest. Get some help and make your budget a useful document. Then be committed to implementing and monitoring the business against it. What works best is if you delegate this so that it can happen without you.
How to use your budget tool
Make sure you reflect on and review your budget regularly by measuring your actual results against your budget.
This will help keep you on track with meeting your targets and be sure to take the time to understand what those differences are and the necessary action that might be needed.
And the good news — now they are easier to prepare
With cloud accounting and technology today, preparing a budget and cashflow forecast is not quite the chore it used to be.
Various add-on applications can take your actual data and produce a base forecast that you can then manipulate in just minutes.
I encourage you to invest in this management tool so that you can keep track of where your pharmacy is heading.
Michelle Seeto, Manager, Business Advisory — RSM Australia Pty Ltd