I know I’m an accounting nerd, but surely I’m not the only one who loves the beginning of a new financial year? It’s time to draw a line in the sand, review what happened last year, but more importantly, focus on the endless possibilities that the future may bring.
How is your business going to grow in 2019/20? Are you going to leave it to chance or are you going to take control and focus on growing your business? Are you working harder than ever but don’t seem to have cash in the bank? Time to set your budget. And while you can start at any time of the year, it’s good to start with a whole new year in front of you!
A budget is an invaluable tool in the business planning process to help to focus your efforts and expenditure. You need to make sure that all the blood, sweat and tears are focused towards the parts of your business that are the most profitable and dump the stuff that causes heartache, stress and doesn’t contribute to the financial bottom line
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.
How long is it since you reviewed the selling price of your good or service. Do you know how much your competitors are charging and what sets you apart? Know your customer. It isn’t always about spending more on marketing or packaging or product.
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!