Most business owners struggle with producing a budget. There are a couple of reasons for this. How many of these statements have you made when sitting down to set your own budget?
- I can’t predict the future
- I don’t know if my everyday activities are going to produce more sales and profit
- I don’t want to put numbers on a page and be held accountable to them
- It’s finally finished for another year
- It’s a shame we didn’t make that profit
- It probably wasn’t realistic anyway
Because these sentiments sum up the experience of many business owners, they don’t place a lot of emphasis or reliance on their budgeting process.
Instead, most business owners end up taking last year’s income and expenses and add 10% to it. There’s nothing robust, meaningful or useful about this.
The other problem with this “last year plus…” approach is that history doesn’t always repeat itself. Nothing stands still and things will changes in your business, the market and by influence of other external factors.
This can have a big impact on your actual performance during the next year.
But what if you could better predict the future by having a robust, meaningful budgeting process, that provides:
- A tangible roadmap for your business growth
- A crystal ball that shows you where you’re heading based on real time information
- Massive road signs that say “Stop” and “Wrong Way”
- A decision making process that helps you invest your time and efforts more wisely
The good news is you can.
Here are my top three tips to build a budget that works:
1. Get the right attitude
Accept that you don’t have a crystal ball, so you won’t get it 100% right. You’ll either underperform or exceed your expectations, but never end up with a result that meets budget down to the dollar.
Instead, think of budgeting as a process that delivers powerful knowledge about your business. But to get the benefit you need to view and use it as an ongoing process.
You just need to do it, as it is an important tool to help manage your cashflow. Every business owner knows how important that is.
2. Put some science behind it
A total sales and profit figure is daunting.
Big targets don’t manifest results on their own and doing what you’ve always done won’t produce better results. Neither will just reacting to opportunities when they arise which can drain resources without providing a good return. So to get growth you need to do something new or different.
To achieve this, we recommend taking a bottom up approach to determine the activities you’ll implement, to achieve the sales you need that generate the profit you want.
The good news is you’ve probably already got the means to do this, but you’re just not connecting the dots.
Most business owners already have a sales and marketing plan and a budget. We recommend you link the two.
Your sales and marketing activity plan breaks down your growth targets into how many leads you need to convert into new paying customers. It also quantifies their average transaction value.
In addition, it reveals additional sales revenue you’ll obtain from existing customers. Revenue growth from this group is achieved by increasing your prices or selling more to them.
How you achieve this growth is determined by the activities you implement to generate new and additional business. Mapping this out, gives you some substance to support your sales growth targets.
To ensure your plan is realistic and achievable ask yourself:
- How much is this activity going to cost me to implement?
- Are there that many customers available, considering market size and competition?
- What resources and capacity do I have to make it happen?
- How many customers will I loose during the year?
- How does that affect total sales?
Once you’ve mapped your activity plan out, set some KPIs to monitor and track the results. These might be:
- Number of leads
- Number converted to paying customers
- Number of purchases
- Average transaction value
- Customers retained
An activity plan that supports your growth targets provides your sales people with an implementation plan to deliver.
When the results start to flow through, you can compare them against your sales budget.
Using the budget and your KPIs allows you to make some powerful decisions about your ongoing activities.
3. Test your assumptions and compare against actuals
Test the assumptions your budgeted figures are based on. Having an activity plan means you can break things down and use this detail to perform some modelling. This allows you to test scenarios and calculate the likely outcomes in advance.
Once you implement, you can use your knowledge and actual results to your advantage.
Your first actual quarter will either validate or show you the corrections you need to make. Either way information is power. The benefit is that you now understand what causes the differences in your monthly forecasts.
You also have the time and knowledge to do something about it. By adjusting your activities you improve outcomes and can achieve or exceed your expectations.
Keep tracking and comparing your results against your budget at least every quarter. This keeps current and accurate information at your fingertips. If you keep working on your activity plans in conjunction with this, you’ll have a powerful management approach.
Now is the time to start preparing your budget for next year, so start applying these principles now and you’ll have a more accurate feel for the budget you’ll set.
Marc Peskett is a Director of MPR Group, a Melbourne based business that specialises in providing, business advisory, tax, grants and funding services and outsourced accounting to small and medium enterprises.
MPR Group are holding a full day workshop on 21 June to help business owners develop their annual budget and implementation plans. To register, click here.
You can follow Marc on Twitter @mpeskett