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Budgeting and Managing Cashflow

f you want to reign in your finances and grow your business (or just keep it afloat in the current economic climate), then working to a strict budget is absolutely necessary. Managing your business's cashflow can be a mammoth task, but it's much easier when you've got a budget to track your spending and performance against.

So, what's the best way to control the budget that you've set to ensure your business's future viability and growth? How do you know if opening a new location is manageable? How much will it cost to start a restaurant?

I'll use a fair few examples surrounding restaurants and hospitality, but the principles remain the same across any business.

Understand the costs of what you're trying to accomplish

Whether you're about to start on your business journey, or you're already looking at opening your next location, it's important to establish both what's currently in your 'war chest' as well as the base costs of what you're trying to do.

Starting on your journey without fully understanding the costs is a definite no. To keep on top of costs, overheads, staff costs and general spending you'll at least need a rough figure for it- being as precise as possible will benefit you in the long run. It's also important to be realistic and honest with yourself, if a project doesn't seem affordable, don't play down the figures and end up with a square peg, round hole type situation.

If you're starting a new business, split the costs that you expect into key areas e.g. front of house staff, back of house staff and their associated costs such as NI and Pensions fall under labour, booze and food will fall under stock. You might also need a significant amount of equipment- can you buy this outright, or will you need to lease it? These are all pretty obvious segments of the business, but it'll help keep your headspace clear if you can put all of your costs under separate headers. Tip: I use a mind map to start with when I'm creating a budget for a new client.

You'll also need a good estimation of the revenue that you expect to generate- take a look at similar businesses (both locally and nationally)- you can look at these businesses on Companies House to get an idea of how well they're doing. If they're not showing as dormant, there's no application to strike off, their accounts aren't late and they've been trading for a few years, then it's likely (but not certain) that they're doing ok.

Although you'll be using £ figures to work out your costs, you'll also need to work out what percentages of revenue each cost is. Most restaurants tend to aim for 25% of their revenue as spend on stock and 33% of their revenue on staff costs. These figures are only guidelines though and different types of restaurant will use different percentage figures e.g. a traditional pub will have a higher % stock cost as ale tends to have a lower profit margin than wine and spirits.

Make sure you add extra on top of each variable cost to account for increases in supplier prices.

Set your budget and track it over time

Once you've agreed on a budget, you should ensure that you've got it in a spreadsheet at the very least, but preferably entered into a finance system like Xero- this will make costs much easier to track as this is where you'll link up your EPOS system, bank accounts and also import all of your bills using something like Dext Prepare.

You're going to need a way to track your actual figures against your budget figures and the best way to do this is with Management Accounts over monthly or quarterly periods. Management Accounts give you an unparalleled insight into how your business is performing and whether you're hitting your targets. You'll also use your Management Accounts to give your General Manager or sales team (if you have one) targets to aim for. After all, if you're not tracking how healthy your business is, how can you expect your team to make any real impact?

Project your cashflow and keep a close eye on your budget

Budgets aren't stationary and business constantly evolves, so it's important to evaluate your budget on a regular basis i.e. if supplier costs increase, how will this affect your GP? Will you have to increase your own pricing? If you're paying National Living/Minimum Wage, what happens to your profit when this rises by an average of 10% in April?

The next item on the agenda is to project (work out) your cash flow. Start with a small timescale for practice (maybe 2 weeks) and build up from there- what money is coming in and what expenses are going out over the next 2 weeks? You should include absolutely everything in this, no matter how trivial- if you usually run to the shop every day for milk and bread, include this in your figures. Cashflow forecasting can be incredibly simple, but the possible simplicity of it can be overwhelmed by how mundane a task it is.

Start with your opening cash balance (what you've got in the bank and/or in the safe) and add in the revenue you know is coming in (you can usually get this info from your till system or merchant services provider's online platform for the next few days) and the revenue you're expecting. Depending on the type of business that you're running, you should also add in any non-refundable deposits that you expect from customers.

After you've added everything in, it's time to take everything out- supplier payments, staff net wages, HMRC PAYE payments, any VAT payments due and any other regular bills you've got coming out (e.g. rent and energy).

Take action to maintain or improve your cashflow

The exercise above should be completed in date order and on a spreadsheet so that you can see the running total of your cash (the cashflow). If after you've carried out the exercise you still have a positive cash balance then it'd be wise to put some of this into a separate account for a rainy day. If your cash balance is negative at the end of this exercise, then you should go through all of your outgoings to see what is necessary and re-evaluate your budget. You may even need to contact your creditors (people you owe money to) and request time to pay what you owe.

If you complete the above, then regardless of how it turns out, you're already ahead of most business owners. You'll also be in a better position to act if you can see what's coming rather than being hit with it down the line.

You should think about:

  • Setting up key metrics for each cost segment, to measure spending, cashflow and progress
  • Run worst-case and best-case cashflow scenarios, so you’re prepared for anything
  • Regularly reviewing your spending and looking for areas to make savings
  • Taking on finance facilities to plug any cashflow holes as they appear.

If you're thinking about expanding your business, or you're looking to start up, then please get in touch. We'll help you to build solid, workable budgets that can be easily tracked against your Management Accounts.

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