7 Tips to Build and Maintain Your Business Budget: Part 1

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This is the time of year when many companies dedicate time and energy devoted to their Annual Budget.  

So, exactly what is a Budget?  A budget is an estimate of income and expenditure for a set period of time.  In other words, it is your plan for how you think the business will perform over the chosen period of time, typically a year.

Budgeting should be the central nervous system of your business. A well-planned and executed budget can help ensure your business is ready to take on new opportunities and has financial safeguards in place should unwanted surprises strike.

Starting the budgeting process can feel overwhelming. Many clients come to me with the same concerns: where do I start and how do I stick to a budget?  

Following these steps will ensure operational wellness:

  1. Know your current numbers. It’s important to keep a close eye on the critical numbers that can help you predict a lag or success of your business. These key numbers include:
  • Cash Flow
  • Profit and Loss
  • Sales
  • Price/Selling Point(s)
  • Gross Margin
  • Net income
  • Total Inventory

    2. Focus on Return on Investment (ROI).  Business owners can use return on investment as a measuring stick for their company’s profitability. The amount of money spent vs. the expected financial return should be a focus of performance management. The data helps measure success over time and takes the guesswork out of making future business decisions.

Simply divide the gains from your investment by your investment’s cost and you have your answer as a percentage or ratio. From hiring a new employee to investing in a new software tool to expanding your advertising, ROI determines whether your efforts are yielding results and how can you properly optimize profitability.

3. Track the sales cycle: There are a number of factors to consider:

  1. How many days does it take for prospects to move through your pipeline? The answer depends on how many steps are in your sales cycle, how complex your product is, and the cost of your offering.
  2. What are the projected sales for the budget period? If you overestimate, it will cause you problems in the future.
  3. What are the direct costs of sales (i.e. costs of materials, components or subcontractors to make the product/provide the service)?
  4. What are the fixed costs?
  5. What are the overhead costs? 

The length of time it takes to convert leads to sales needs to be factored into your budget. Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months and beyond. This will enable you to analyze your margins and other key ratios such as your return on investment.

Stay tuned, my next post will share the rest of these budgeting tips to keep your business healthy and on track.  

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