So it’s a new financial year and you’re probably wondering what 2018-19 will bring for your business, with lots of questions and unknowns…
Will you keep doing the same as usual… or are you planning on how you’ll grow your business?
Are you considering bringing on more staff or outsourcing to a VA?
Maybe you’ve thought about changing suppliers or increasing your product line?
Do you know how these decisions will affect the financial success of your business? Can you be sure the extra work, expenditure and risk will be worth it?
If the answer is, I don’t know, to any or all of these questions, it’s time to set your budget. A budget is an important step in the business planning process to help to focus your efforts and expenditure, making sure you get the best “bang for your buck”.
The first and most important step is to set your goals. Make them SMART – Specific, Measurable, Achievable, Realistic, Timely.
What do you want your revenue to be? How many units do you want to sell? Think about pricing, what your competitors charge and how long it is since you’ve reviewed your pricing structure.
Next you need to gather the numbers – starting with your income and expenses from at least the last financial year (three years is even better so that you can see trends).
Identify which of the expenses are fixed. Fixed costs are those that do not change no matter how much revenue you earn. Things like rent, insurance, telephone, internet and your salary. Then consider other expenses that have an impact on your bottom line.
Moving on to the cost of production – what is it going to cost to generate the number of units you’ve set as your target? This includes the cost of materials (or wholesale price), freight costs, salaries of staff etc. These costs have a direct relationship with your revenue. So, when you sell more product, you can expect costs to increase by the same ratio.
Now it’s time to consider all the other costs businesses incur. Such as advertising, marketing, promotion, printing, etc. These are discretionary, and you need to understand the effect of this expenditure on your bottom line.
For example, you’d assume spending on advertising will increase sales, but you need to be realistic about the relationship between amount the amount spent and how much revenue generated. What if you didn’t do any advertising or only free advertising? How might that work for your business if you were to reduce costs there?
At the end of the day, being in business is all about revenue exceeding expenses. So, you’ll need to be prepared to become very familiar with the dollars coming through the door.
How many units do you need to sell to meet your annual revenue goal? Be realistic with how many you can sell taking into account whether it’s even possible to physically generate or stock that quantity of product within the year.
If you’re selling a service instead of product, consider how many working hours there are in a year and how many hours you’re willing and able to work.
It may be time to also review the selling price of your good or service. To do this, you must know your market, what sets your product or service apart and what the customer is willing to pay.
Don’t forget not all ways of increasing revenue come at added cost. You must link your revenue goals closely with your marketing strategy so that every dollar you spend drumming up business works well for you and has maximum impact.
The final step of business budgeting is of course to make sure you regularly review what’s happening with actual expenditure versus your original budget – at least monthly. I’ve seen many clients start out with great intentions and then not follow through…. which means the original time and effort was wasted resulting in them strolling down a boulevard of broken financial dreams.
When it comes to sitting down and nutting out your business budget, there are some key points to remember:
- You must be realistic… especially about the income you can generate.
- Increasing revenue is not just about increasing the number of sales. Prices and margins are equally important.
- Consider what has happened in the past and use that to inform future growth.
- Your financial budget should be a component of your business plan and be consistent with your marketing strategy.
- Never spend money so that you can get a tax deduction. There must be a net financial gain for your business.
- Before increasing spending, ask yourself: “what income will this bring in or what costs will this save”.
- Always review and re-tune your budget throughout the year. The world you are operating in is constantly evolving and your budget needs to as well.
Do you have questions about how to give your business a head start by planning for the financial year ahead? I’m more than happy to chat with you and offer a FREE 30 minute initial consultation which you can book online here!