Budgets are essential for businesses to set goals and to control expenses. The unfortunate reality is that probably half of all companies don’t set budgets, and 30-40% of companies don’t use budgets in a way that’s helpful for the business. This leaves only 10-20% of businesses that are taking advantage of an enormously powerful and relatively simple tool.
Complete the following steps for setting budgets to grow the bottom line:
- Set goals by month for revenue production and profitability. A budget that is an annual number divided by 12 is a guarantee for many months of frustration. Simply stated- it doesn’t match the business cycle, so it’s already wrong! Most businesses have some seasonality. Establish goals based on actual history of prospecting vs. performing the work. For example, many professional service consulting businesses go quiet from November to January. Other businesses are slow in the summer. Accept the seasonality and set expectations and budgets accordingly. Consider a rolling, 12-month budget, updated quarterly. Also consider a revenue annual budget for years 2 and 3, to provide a starting point for strategic decisions and their impact on annual budgets.
- Allocate budgets between sales people and/or products. What is the mix? What was it last year, and what will it be for the upcoming year? Line item budgets enable companies to set tangible milestones for growing the business. Done properly and with enough detail, managers can forecast the mix of services that drive profits. Also consider relationship building vs. sales and bidding. Maybe the top sales person, VP of Sales or Founder have different roles. At some point, creating relationships is more important for the Founder which enables the sales team to actually get the work. This is helpful when setting goals, maybe the “top dog” should have less sales than his direct report.
- Consider margins when budgeting. Most companies look to drive top line revenue growth but that may result in decreased profits if all the growth comes from low-margin, high dollar work. Look at both revenues and margins, and go after the market where the growth is trending. Understand that high volume with low margin work may shift focus from the lower revenue but highly profitable other services offered.
- Determine the impact. How does adding a new sales person affect the bottom line? A budget can tell how much revenue is driven by each decision. If the salesperson’s goal is x, and he or she produces y, how long does it take to break even? What do other companies spend? A great way to do this is talk with competitors about percentages, not exact dollar amounts, to stay on top of industry standards. If their Labor % is 32 and yours is 35%, you might have a problem. If yours is 30% you might be doing well.
- Provide a foundation for forecasting future results. Companies must depend on a baseline foundation, or else they’re flying blind. Don’t let the budget sit idle. A forecast is a dynamic document; it evolves with the business. A budget makes forecasting much easier.
Setting budgets takes time. But the value of the discipline is more than worth the investment of time and energy it takes to fine tune the numbers. Next month’s newsletter will cover managing budgets. We work with budgets every day, especially this time of year, so please let us know if you have questions or need assistance.