It is that time of year again. Pumpkin spice is the flavor of the month. The leaves are changing colors. Holiday ads and displays are starting to appear. And then, someone reminds you (today, it’s me) that it’s time to start putting together your budget for the coming year.
Creating a good, ambitious, yet achievable budget for the coming year is one of the most important management activities a business owner can do to improve performance. The budget sets the goals and targets for the coming year. It sets parameters for major decisions and daily business operations. It also creates a roadmap that we can use throughout the year to determine if the business is on track or if the business owner needs to be making adjustments.
So, what are the key steps in getting through the process successfully?
1. Start with your 5-year goals. That's correct: 5 years! If you have developed a long-term plan, good for you. Use it as the guide for what 2021 should contribute to the plan. What should it generate in profits? How much will you add to your infrastructure next year? What will you invest in marketing to not only get leads but to build your brand and solidify your market position? Questions like these will help you define what 2021 needs to look like for it to be a success and move you to your future goals.
2. Build the budget from scratch. Do not just take the last budget and pick a new revenue goal. Build the model from the ground up starting with your net profit goals for the year. Keep in mind that you pay taxes on those profits, so be sure you take that into consideration. Next, add your overhead expenses to your net profit to figure our what you need your gross profit on jobs to be for the year. Based on that, build your goals for sales and profit margin that will cover overhead and generate the profit you need.
3. Get input from your team. When looking at sales, profit margins, expenses, and other budget factors, get input from the people in your organization. In many cases they are closest to the work and their participation helps garner buy-in to company goals.
4. Create the budget month-by-month. To get a true picture of how the year will flow, it is important to build the budget by month. Sales and expenses do not flow evenly over the year and the budget should reflect the likely highs and lows for each.
5. Capture your assumptions and be able to defend them. How much will sales increase? What will gross profit margins be? What will payroll be? How will other expenses increase or decrease? What is the rationale for each of the assumptions being made?
6. Let your budget drive your actions. Once the budget is complete and you have documented your assumptions, you have a road map for what needs to happen in 2021, what needs to be achieved in sales, profit margin and expenses for the business to succeed.
7. Measure what happens. With each passing month throughout the coming year, measure the actual performance of the business against the budget, and when things are off-track, make changes in your operation to get back on track.
With the right process, your budget will be a tool, a road map to help you guide your business to success in 2021!