We are one month away from a new year. As the owner of the business, you're probably focused on the company getting projects done by year-end deadlines or the like. The immediateness of those deadlines is consuming all your attention.
But there is a task that won't get done unless you decide it is important and you block out the time needed to make it happen.
The task: A budget for the next year.
Why do I think it's important to go into the new fiscal year (which for many companies starts in January) with a budget? Here are some things to keep in mind.
Set a Goal
Imagine having a finite amount of time to take a road trip, with several can't miss stops in mind. Your choice: Just start driving or make a plan on how to see everything as efficiently as possible.
How can you get where you want to go if you don't get clear about what that is?
You need the following when budgeting:
- Overhead $: The costs the business incurs whether or not it has any work. This includes your Salary and Benefits as owner of the company. You have a pretty good handle on Overhead $ because you tracked them every month for this current year (or you should have!).
- Net Profit $: The return the business is supposed to generate because of all the risk it takes on.
- Gross Profit $: The sum total of the company's Overhead $ and Net Profit $.
- The company's Gross Percentage: The percentage of Revenue $ the company will generate that is Gross Profit $. The better you are as a salesperson, the higher the Gross Profit Percentage you can sell at.
Divide the Gross Profit $ by the Gross Profit Percentage and you will have the Revenue $ that the company needs to generate for the coming year.
Subtract the Gross Profit $ from the Revenue $, and you will have the Cost of Goods Sold $ (COGS), which are the costs of labor, materials, and subcontractors that will be needed to build your company's projects.
Now you have a destination to focus on!
Who's Running Whom?
A business operating without a budget is not a business.
It is a way for someone to stay occupied and hopefully make a decent income. The company will likely never change.
The owner works for the business instead of the business working for the owner.
What do you want from life, for you and your family, and for your collective future? Factor that into your goals for Salary, Benefits, and Net Profit, so you can start to save the money needed to fund achieving those goals.
Monitor the Results
Okay, you put together a budget for the coming year. That's great! Now what?
Monthly, review the actuals for the most recent month and for the year-to-date compared to your budget. This is similar to what you do when you are following a map, with your route and destination marked on it.
Review your profit and loss statement (results to date for the year) and your balance statement (the scorecard for the life of the business). Pay attention to what does not make sense!
It is best to do this review with your bookkeeper, particularly if you are in the process of learning to understand financial reports. I did this routinely, as I was not in touch with the needed data on a daily basis as my co-owner (in my case, my wife Nina) was.
If you've never done any of what I'm suggesting, then you are probably overwhelmed at this point. Bust through your apprehension. Learn what you have to know to be an effective owner of a business.
I took some community college classes in accounting early in the life of our business. I did this just for several months, not for years and years.
There are a number of good books on the subject and consultants who specialize in this work. The best way to find the most useful resources is to ask your friendly competitors, the ones who seem to have it together, who you should reach out to. That is how we fond our accountant.
So, what's it going to be? Will you end this year totally consumed with meeting deadlines for project completion? Or will you find the time to build a budget for next year?
Without a road map and a destination, you'll always be busy but won't get anywhere. How do I know? Our business became successful when I started focusing on where I wanted to go.
You can make that same choice.