“Budgeting”, radar for your business.
All of us have experienced the unexpected financial crisis in our lives at one point or another. Sometimes they are minor and merely impact our disposable income for the week or month. Other times they are more significant and might require drawing from savings or using a credit vehicle. In our personal lives this is pretty easy to keep in check and controlled. Business however can be significantly different. Let’s examine this closer.
Most businesses have a variety of expenses occurring at a frequent pace but with varying amounts depending on business levels. Often there is empowerment to make spending decisions as well. This can create a significant challenge at times. Additionally, how do you decide on improvement purchases? Sure, a new widget for $200 is easy but what about a new tool or software for $8000 or $80,000; how will it impact the business? What are the savings associated or increased sales expected? Great businesses anticipate their needs ahead of time and make sure capital or manpower are available to grow. A budget helps you anticipate your capital needs and so much more.
THIS IS THE VALUE OF A BUDGET. Plug in these costs and anticipated savings to see how this looks. Ask yourself, are you currently hitting your budget?
The question we often hear is, “How do I know what to project for my sales revenue?”. The answer is easier than you think. It really comes down to using the “EWAG” method. This accounting technique has helped many emerge as brilliant leaders. It is, Educated-Wild-Ass-Guess. In all seriousness, anytime you project, you are guessing. That is what forecasting really is; just ask the weatherman. The key is in the educated part. Let’s examine the revenue question again. Look at your last year or two revenues and ask yourself some key questions like these:
• Was last year unique for any reason?
• Do we expect this year to improve? Why? By GDP growth or inflation?
• How will the new product launch impact us?
• Are we adding a new location?
Now that you have done this, begin to lay in each month’s revenue. Be sure that you also ask yourself about seasonality or traditional sales swings; holidays, fall, etc. At this point you have created an EWAG for your next year’s sales. If you continue now with all of your typical costs in a similar manner you will have created an actual budget. One that is founded on good logic and business knowledge.
We are not done yet though. We have one last step. What are we trying to accomplish this coming year in order to grow our business? What strategic steps do we need to take? New hires, added inventory, new equipment are all items to be included in this step. Now sit back and ask yourself is this the profit we want to achieve next year? Of not what else can we do? You are now on your way to driving your business forward.
Most people would not go for a hike in the woods without a map or a compass, why try running your business without a budget? Many businesses run on what I like to call the “cash register method”. The money goes in and the money goes out; usually we have some left (PROFIT). Using a budget and working to meet that means you know with a degree of certainty that your business is on track. We encourage our clients to update their budget with actuals as they move month to month. That way they know exactly how they are doing; like a SCORECARD.