Budgeting – Putting Your Business Plan Into Figures
It’s that time of year – time to create your 2017 business plan and, ideally, a budget for that plan. While the idea of working with a budget may be foreign to some business owners, budgeting is one of the most fundamental tools of managing your business each year and keeping it aligned with your short- and long-term goals. Start with planning for the year ahead just how much it will cost to run the business. Then develop a revenue budget based on key customers, products and services you’re expected to sell and current market conditions in order to cover those costs, pay salaries and still have profit left over. A budget has been described as a business plan expressed in numbers.
Estimated Sales - Estimated Expenses = Profit (or Loss)
In developing projections for a year ahead, you’ll be working in the dark to a certain degree, but anyone who has been in business for a couple of years will have the financial records to make a reasonable forward prediction of their sales and expenses based on averaging past years. You might call this your “no-growth” budget – you have estimated just the minimum necessary to keep the business operating. If you are interested in growing the business though, you start with setting a sales goal you would like to (realistically) obtain. Once an estimated sales goal for the year has been decided a whole series of planning decisions cascade out from that: Is extra inventory required? Will you need to add more employees or move to bigger premises? Will you need to put more resources into marketing to gain new business? All of these add to the “estimated expenses” portion of the equation. To cover them and achieve the desired profit, there needs to be extra “estimated sales.” If your aim is business growth, the starting point is to build a sound estimate of extra cost and the extra sales revenue necessary to cover the costs so as to reach the desired profit. These things can’t be left unplanned, the costs and sales merely guessed at, or the whole growth project will operate haphazardly, and you may out-spend the additional revenue you obtained. Budgets are usually created for a 12-month period with month-by-month estimates of sales and costs. That includes expenses that come up only once or twice a year, such as insurance or association dues. In this way you can plan ahead for the cash flow impact of the expense. As you conduct business throughout the year, compare your actual figures to your budgeted figures. This needs to be done month by month and requires some discipline, but the payback is worth it. It will allow you to manage your spending so that you know you are following your plan and not cut into or eliminate your profit. You will also be able to see if sales have met projections and will cover expenses. Where there are variances, ask yourself why the numbers are different. If some of your expenses, for instance, are higher than you expected, do you need to look for ways to cut them, or did business increase more than was expected and if so add to your variable costs? If sales aren’t on track, what has happened to cause the difference and how can you improve them? Or would it be more realistic to accept they will remain low and trim future costs to match? Budget variances can be either warning signs or opportunity signals, and the information they provide should be used constructively to decide where changes need to be made in operations to reach your budget goals. Alternatively, if you regularly fail to reach your monthly estimates, your budget figures are a warning to pull in spending and set more realistic income goals. Having a budget means having some control of your finances in advance. Setting the standard for your spending against expected revenue and having a tool to compare the expected figures against the actuals each month will give you a way of monitoring and changing plans to stay profitable. Use your budget to run “what-if” scenarios to determine where it is suitable to cut costs if experiencing a downturn. How does your budget align if you reduce your rent versus eliminate positions? By comparing your goals to your budget regularly, you are positioned to take action immediately and keep your business on track, whether in a growth phase or experiencing a downturn. When you work to a budget you have one of the most effective management tools of all – a benchmark that you can use month by month to check your progress toward your business goals. Contact our business advisors to help you prepare your next business budget today.