We’re almost at the end of the first month of the new financial year. How are you tracking on your budget thus far?
“Oh, was I supposed to be finished my budget already”, I hear you ask.
Well preferably, yes. But don’t worry if you haven’t, just get to it and set your goals for this financial year. You’ll miss 100% of them otherwise.
Budgeting can be a daunting task. But they are a great tool to be using in your business to keep you on the path you are trying to achieve. And yes, some businesses find it difficult to predict what they hope to get in as revenue. Expenses generally are easy to predict as most of them can be fixed.
So don’t start with revenue when preparing your budget.
Start at the bottom and work out the profit you would like to make, or the net return you would like to achieve. Then work out those fixed costs that you will incur, regardless of whether you earn any income whatsoever. You can then analyse your budgeted salaries for staff, and the associated costs with employing people.
Then look at your margin that you normally earn from selling your product, and then you have your estimated income that you need to earn each month.
The biggest mistake here is we tend to say I want a profit of $X for the year and divide this by 12, thereby giving you a revenue top line of exactly the same each month. And no business is going to have the same revenue each month as seasonality of your product and customers will mean you never show the same revenue each month.
So after you have projected your bottom up budget process, you may need to adjust those monthly profit expectations with the seasonality of your product.
When you have determined your targeted revenue model, you then need to break this down to analyse where this income may come from. For example, if you have a couple of revenue sources you can then allocate a breakdown of expected revenue from each department. If you sell bigger items then analyse a breakdown of how you think each revenue item will come in.
If you’re revenue is pretty constant and you want to budget for an increase, then breakdown how that increase could be achieved. Don’t simply say to your team you want to see an extra 10% of sales this month if you haven’t given them an indication of what that would look like.
For example, a consulting type business this could mean one or two more projects for the month. For a retail business it could mean clearing out a particular line or range of clothing. Give your team members particular targets and talk in their language when you are thinking of budgeting, not just percentage increases.
And then you may need to give incentives for achieving these targets. This motivates some people to work harder for you. But once again, these targets need to be set in their language and within their responsibility. No point in setting a profit target if they have no control over the costs. A target of selling a product at a particular price and volume is within their reach. Just don’t mark the price down on them half way through the month. Treating people fairly is what will motivate them more, not alienate them.
So now you’ve had a chance to reflect on your budget process. How are you tracking this month?
Set your goals and your targets now before the year gets too far down the track. And celebrate the victories as you go, but hold steady if you don’t make them one month, as you might catch up the next.