When you think of a holiday, the first thing you do is plan. You plan where you’re going to go, how you’re going to get there and what you will do when you arrive.
Business is no different. You need to plan where you’re going to go, how you’re going to get there and what you will do when you arrive.
The Destination
If you think of your business as though it is a holiday, the first area to plan is the destination. The destination could be:
- The dollar amount of revenue
- The number of new clients
- The number of products you sell
- The amount of your take home pay
- The dollar amount of profit
Each one of these is a goal that will form part of your budget.
How You’re Going to Travel
Now that you’ve decided what your destination is going to be, how are you going to get there? These are answers to questions like:
- How many hours do I need to work?
- Do I need help with more team members?
- Do I need to rent premises?
- Do I need to rent larger premises and relocate?
- What marketing strategy will I use to get to the destination?
- What marketing costs will I need to spend?
- Do I need to undertake training and if so, how much will that cost?
- Am I going to run events and if so, how much will they cost?
- Do I need to implement new systems into the business and how much will they cost?
- Looking at my costs from last year, do I need to spend the same again this year?
Each one of these is the costs goal in your budget
What You’ll Do on Arrival
Arrival in business is a stepping stone to the next destination or goal. Think about what your business will look like when you’ve achieved your destination goal or goals. With this in mind, you may also re-consider some of the costs and identify ones to eliminate or new ones to add in.
Creating the Budget
Now that you’ve identified the destination, how you’re going to travel there and what you’re going to be doing when you arrive, it’s time to put that all together into a budget.
Taking each revenue stream and your goal for the year, break it down into monthly goals. Rather than simply dividing the goal by twelve, I recommend that you divide by ten instead. There are invariably a couple of months in the year when your income will drop off – usually December and January combined equal one month of income and then a combination of April with Easter and school holidays and June and July with financial year end are also months when revenue drops off. Take this into consideration and reduce the revenue in those months and spread the income across the other months.
Then take each item of cost and break them down into monthly goals too. Again, you may need to consider any fluctuations in costs due to the above. But don’t forget that many costs will happen each month no matter whether you have revenue or not. So, in most cases, the divide by twelve works well.
Total each months’ revenue, total each months’ costs and then calculate your budgeted monthly profit by deducting the months’ costs from the month’s revenue. You may well find that there are a few months where you are budgeting to make a loss – again December and January are the most likely months. In the far column create totals and look at the total of the budgeted profit for the year. If you’re happy with this and you think that the figures are achievable, you’ve created your budget. If you’re not happy with the result, go back and look at the numbers and decide what you can realistically change.
The final step and one that is just as important as creating the budget is to load the figures into your accounting system. Then every month when your accounting system is updated and reconciled, print out a profit and loss for the month with the budget comparison and have a good look at it. Identify what is on track and what is off track and think about what you need to change to get back on track the next month.
The key to achieving your goals and reaching your destination is to put them in writing (the budget), and then check them regularly (the monthly profit and loss actual vs budget comparison report), and then use that information to make decisions about the upcoming months to make sure you get to your destination.
