Running a business is electrifying, exhilarating, and even a bit scary. An often overlooked area for entrepreneurial companies is the financial side of the business. Yes, we’re talking about your budget (come on – budgets can be exciting too!). Companies with no budgets have no financial roadmap and therefore, no plan for profitability.
Below are a few tips to consider when creating your budget.
#1. Do Not Make it Complicated
Developing a business budget should not be a complicated process. And, is no different from a personal budget – money in minus money out equals income. If you make it more complicated than that, you are only creating places to hide from the truth. Did you stick to your budget? Are you making more than you’re spending? Or are spending more money than you are making? As business owners, we need to face the brutal facts when it comes to our company budget and to take appropriate actions to protect the cash in your business.
#2. Prediction vs. hope: Identity what amount of money will come in.
Don’t get caught in the trap of basing your budget on the hope of what revenue might come in. Take the time to thoroughly think through what the expected income will be for your business for the next 12 months. Review historical performance, opportunities in the pipeline, your sales cycle, and consider what trends are happening in the marketplace as well as in your business. Get clear on the assumptions that are leading your conclusion on what your revenue will be. How realistic and valid are those assumptions? What is the amount of revenue your business will bring in at year end? What must happen in order to ensure the revenue will be achieved?
Forecasting a future income is prediction and prediction is seldom 100% accurate. Do not avoid budgeting because you are not able to get it exactly right. Year after year of working on your budgeting will allow you to become better at making a more accurate prediction.
#3. Start with profit, not expenses: Begin with the end in mind.
Most business owners allow profit to be an afterthought when in reality it is actually one of the three most important end games. Make a commitment to take action to protect your profit rather than letting profit be a byproduct of expense. If you have no idea what a reasonable profit goal is you can research what an industry norm is for a business similar to yours.
Focusing on profit often has a negative connotation. As a business owner, your biggest liabilities to going out of business are not enough cash and not being able to coordinate the actions of your people. Let’s face it, business is all about people and profit. You must be a good steward of both.
#4. Identify your cost distribution model.
Once your profit expectation is set and your income is known you will have a clearer understanding of how much you have to spend. Now you need to get clear on the most effective way to spend that money across your key expense categories. To do this, identify the 20% of the expense categories that account for 80% of the expenses. For example, payroll, materials, sales and marketing, technology. When you have clarity on what the most important costs to the business are and what the balance of cost ought to be across those categories, making decisions on all those demands for resources becomes easier. Simplifying all the numerous costs in the business to a few key categories allows you to keep a pulse on how your expenses are tracking.
#5. Take consistent action.
Determine how you will track, report and review how you are performing to your budget. Keep this simple. Excel, online software program or budgeting app are simple tools to use when organizing a budget. The magic is in your discipline to tracking, reporting and reviewing.
Set a minimum of a monthly cadence to review your financials. Look for ways in which you can reduce expenses and increase revenue. Get creative, make it fun. It is the game of business and you are playing against the natural economic trend of expenses always rising and revenue always declining.
A well thought-out and followed budget will allow you to create stability in your business, with consistent growth and increased profitability.
About Traction Coach:
Your greatest assets are your people. At Traction Coach, we are all about the People, specifically your people and bringing them together to create a high-performing, cohesive team. Through our partnership, we will help you leverage the energy of your people and create a shared vision. We guide your leadership team through the proven Entrepreneurial Operating System® (EOS) process to create alignment and to empower the natural tendency of your team to consistently execute towards this shared vision