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How to Set Up Business Forecasting & Budgeting for the 2021 Financial Year

Written by Adam Birrer . July 07, 2020
6 min read

It was in the early days of March 2020 when I committed to writing a BLG article regarding budgeting & forecasting for the new financial year.

With everything that has transpired since, the article I’m sitting down to write now in late June 2020 is a little bit different to what I had in mind originally!

While the COVID-19 situation in Australia thus far may not have quite reached the disastrous worst case predictions being made a few months ago (both from a health & economic perspective) there is still a long way to go before things are back to “normal” and so much uncertainty around the future. It is this uncertainty that makes forecasting and setting budgets for business an inherently difficult exercise right now.

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How to Budget During Uncertainty

A budget is essentially a financial plan for your business that sets out goals for income and expenditure over a given period of time. In practice this is often mapped out annually at the beginning of the financial year, and is then used as a management tool to compare actual performance to targets, highlight potential improvements and create accountability. In the current circumstances especially however, we need to be realistic that plans can and will change quickly. Indeed, setting a static budget for the next 12 months would, for many businesses, arguably amount to a waste of time!

Forecasting is a related process that involves projecting the expected outcomes for a business (from an income and expense, cash flow and/or balance sheet perspective) based on assumed conditions. It may be carried out as part of the budget preparation process, but also, as a “what if” tool on an ongoing or ad-hoc basis to aid in decision-making and provide insights into where the business is heading. Of course, the difficulty now is determining what assumptions are the right ones to make.

That is not to say the usefulness of forecasting and budgeting as a business decision-making tool is diminished at all. If anything they are more essential than ever, but need to be approached from the right perspective.

Key Focus Areas to Help with Forecasting

From my point of view, below are some key areas businesses should keep in mind when forecasting and looking to understand their outlook for an uncertain 2021.

Allow for Flexibility


Forecast models should be responsive and based on key drivers of performance or profitability specific to the business. Whether using Excel or another solution, a well-built model should allow key variables to be changed on the fly to provide timely insights into consequences for the business as circumstances change. This will also then assist in adjusting budgets as required to keep the plan and targets for the business relevant.  

Range of Scenarios


Once a flexible model has been built, time spent looking at different what-if scenarios is likely to be more valuable than trying to get the fine detail of a forecast worked out to the last dollar given this is subject to change.

For example, a business might look to understand at a high level:

  • What might happen financially if there is a re-escalation of COVID-19 restrictions?
  • What is the impact of government stimulus measures (both internally and externally i.e. demand & economy level) and what happens when these finish up?
  • What if a key customer runs into trouble and that income stream dries up?
  • What impact would an innovative new idea or opportunity have on the business?

Cash Flow

Now more than ever, cash flow is of critical importance to business. Being proactive about upcoming cash flow issues now is likely to be far better than asking for further assistance from creditors at the 11th hour!

  • Many businesses may have accessed deferrals of tax payments with the ATO, loan repayments with their bank or rent with their landlord under COVID-19 – in some cases maybe all three. These deferrals will be coming home to roost over the next 3-6 months when repayments are required, so what impact will this have on cash flow?
  • Debtor collections – can we really assume the business will be paid on time? What is the impact of expected payment timing on liquidity and working capital?

Government Stimulus

Payments under a range of measures including the Cash-Flow Boost and JobKeeper will continue to be received by eligible businesses over the coming months and should be factored in.

Forecast turnover for the September quarter should also be assessed by businesses that have not yet qualified for JobKeeper to date – if this is showing the required decline, it may be possible to register for assistance now as the turnover test works on a projected basis.

It was also announced recently that the increased Instant Asset Write-Off stimulus measure has been extended to 31 December 2020. Forecasts may help business owners consider if the next 6 months is a good time to make any planned capital expenditure i.e. whether this is affordable and what the expected return on investment is.

Opportunities

Despite times being tough for many businesses, the focus should not simply be on survival. There will be opportunity to grow and improve even in the current climate. Forecasting can help identify and assess opportunities, and budgets are still a great tool to help drive improvement whether it be cost reductions or otherwise.

Revisit & Adjust

Make reviews and updates of budgets and forecasts a more regular practice than usual. If this was usually done monthly or quarterly, do it weekly or more regularly when the news cycle and government announcements dictate. This will help the business stay one step ahead.

As Chartered Accountants and business advisers our team at BLG are well placed to help you prepare budgets and forecasts, understand the numbers and make decisions to benefit your business in these uncertain times. See how we can help you and talk with us today.

*This information is relevant at the time of publishing and is subject to change*
Written by Adam Birrer . July 07, 2020
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