Recently the UAL Enterprising Alumni Association held an extremely informative and insightful workshop on finance and budgeting, which was led by Shaili Poddar. Shaili studied BA (Hons) Fashion Management at London College of Fashion (LCF). Shaili has gone on to have an extremely diverse and creative career and now works in Strategy and Operations Consulting at Deloitte Switzerland.
If you couldn’t make the workshop and you are interested in or already running your own creative business, do not fear! Shaili has put together her top takeaways from the session.
Essentials of Finance
- Cash is King: The healthiest (financially) companies are those that are profitable and that have a good cash flow. It is important to identify and understand the costs that underlie your business so that you can control them. You should always have access to an overview of the cash coming in and the cash flowing out of your business.
- Know and control your working capital needs: Your working capital requirements will change as your business grows. Working capital refers to the short-term assets that are available to meet your short-term (current) liabilities. The Budgeting process will help give you an overview of your expected cash inflows or outflows so that you can better understand and estimate how much running cash your business needs to run all the time.
- Profitability does not tell us the whole story: It is possible for companies to be profitable and still go bankrupt. This could be due to many reasons but usually, it is because of ineffective cash management and cash flow problems.
- Main financial statements you need:
- The Income Statement: tells you how much profit or loss the company has generated over a set period of time.
- The Balance Sheet: shows you how well a company is using its assets and managing its liabilities on a given date – it is a snapshot of the financial position of your business at any point in time.
- The Cash Flow Statement: shows you the company’s sources and uses of cash over a period of time.
An entrepreneur maximises long term profitability by increasing assets and decreasing liabilities while focussing on cash generation and collection.
Budgeting for Success
A budget that is fully aligned with strategic objectives, supports entrepreneurs in making decisions that work towards achieving the goals of their company.
- Have a clear vision of your mission, values, strategic objectives and business model.
- Have a plan to decide where you want to go: create a short to medium term plan from an operational perspective.
- Create a budgeting process where you would outline financial measures and targets to meet plans. Finally, the last step is to measure and track your variances against the budget. (Actuals vs Budget)
There are six main steps to create an Operating Budget for your business:
- Define your goals
- State your assumptions
- Estimate sales volume
- Estimate revenues
- Estimate COGS (cost of goods or services sold)
- Estimate operating expenses
The main steps behind tracking and re-evaluating your budget are:
- Assess performance – conduct a variance analysis on budget vs actual financial information.
- Reassess your budget – Budgets are usually made on an annual basis. Reassessing a budget on a quarterly basis is a good way to check your budgets to see which estimates are inaccurate and to make a judgement call on what may need to be changed in the next budget.
- Adapt budgets and make changes – If there are large variances between your budget and actuals then the budget may need to be adjusted accordingly. You would need to adapt the budget to any changes in your assumptions or the market.
- Document your budget assumptions – It is good practice to document your assumptions and estimates. This will help you to improve and prepare for next year’s budgeting process.
Finally, an entrepreneur must develop an understanding of the trade-offs involved in allocating spending in a particular way to build a business. Some questions to ask yourself to help you overcome your spending habits and assumptions:
- What is the impact of your expenses on potential clients?
- How will your employees react to spending patterns?
- Do your colleagues understand that your spending is meant to benefit everyone?
- How can you focus your spending on your business’ core competence?
- What can you afford to lose?
We would like to thank Shaili for volunteering so much of her valuable time to lead this event on behalf of the UAL Enterprising Alumni Association. If you would like to get more involved in the association in any way, you can get in touch with us at firstname.lastname@example.org