Interestingly, people go to extraordinary lengths to avoid budgeting, maybe they think it’s too boring, too complicated, unnecessary, or they need a crystal ball? They couldn’t be further from the truth. Particularly for start-ups, creating a budget is critical to safeguard your business and maximise its chances of surviving beyond the first few years. Our business plan works hand in hand with our budget, because we know every business needs both if it’s to succeed. Without a budget how do you know what you need to achieve? Having clear financial goals, helps you shape your broader business strategy and gives meaning and purpose to those within your company, setting targets, monitoring costs, inventory and providing the platform to really understand your business.
There are four key steps to budgeting:
- Know your costs
You need to understand your business and your costs – separate and learn about your fixed costs (generally those that are set, rent, insurance, utility bills etc.) and variable costs (all other changing expenses). Interestingly things like wages, depending on your industry and staffing contracts could be either fixed or variable. This will help you manage your costs year on year, and address overruns and tweak accordingly.
- Predict sales
You need to know how many leads you need to generate and convert into sales to hit your targets. Most businesses sales fluctuate throughout the year and can be attributed to seasonal factors. Try to accurately predict your sales volume on a monthly basis, knowing your peaks and troughs can also help you schedule requirements such as annual leave or training. Compare your historical data (last year) to the proposed percentage growth for the current year (this year). Review things you are doing differently both internally (embedded processes, upgraded systems) and external factors that may be impacting your business (spike in interest rates, cost of goods etc.) If your business is a start-up, when it comes to predicting sales consider talking to prospective clients, ask them when they are likely to buy or use your service. Start conversing with them in real life and online. You can also compare your business to similar businesses to help set your sales goals and break down monthly and daily targets based on your overall bottom line goals.
- Know and flex your budget line by line
When you have determined your expenses and predicted sales, you can see the proposed consequence to your bottom line, which is great, because it gives you the capacity to tweak the budget to give you a more positive impact. For example, if you know you need to convert five leads a day, look at your budget and know your trigger points to create and convert those leads. You may be able to reduce or increase your marketing spend, or focus on, or make changes to a particular strategy to focus on a particular buyer. In the event of a bad sales month (revenue below target) you may need to trim other areas of your business in that month to keep your full year targets on track.
Your budget needs to be a living document – this is not “set and forget”, this is “Give it life and breathe into it”, and you need to actively review your budget and keep it alive. The best way to do this is to record figures ‘Actual Vs. Budget’ to accurately report on, and know the status of your business. Although review of the budget is rigid, you do have flexibility as required, for example you may need to curb spending around variable costs, or look for alternative premises to impact your fixed costs, or perhaps you need to increase your training budget. Whatever it is, it’s based on real figures and outputs that You are recording around your financial goals and business strategy.
You need to know how to measure your success, and we want you to be successful, which is why at Ross Group we firmly believe in your business having a budget, contact us to help you establish yours.