As you and your organization navigate or enter the season of annual business planning, we want to help you turn meaningful commitments into measurable financial outcomes shared with leaders and team members in the form of next year’s goals.
An essential part of this process is budgeting. Budgets make initiatives real as you outline how these decisions should impact your revenue, expenses and profit.
In this episode of the One Next Step, we’re going to help you build a plan for your company’s money by teaching you how to create an annual budget for your business.
While this may not be the sexiest topic, it is the difference between breaking even, falling into a black hole, or growing bottom line.
To help you build or refresh your budget, I break down the essentials of a business budget and walk you through the budgeting process I've perfected over the years.
Here are some of the takeaways from the episode:
1. Forecast your annual revenue by month.
Start by finding out how your business operates, and then forecast what that's going to look like on an annual basis.
You’ll never know what you can afford if you don’t know how much money you'll have. As you forecast revenue, consider your business’s seasonality, how many leads are in your pipeline, how long it takes you to close these leads, and when money will arrive in your account based on your business model.
Reference industry experts and benchmarks for your initial forecasts as you get started if your company doesn’t yet have historical data.
2. Determine your margins in advance.
The goal is to be profitable. Determine what your cost of goods percentage would be and what you want your net profit to be.
With your revenue projected for the next 12 months, decide what percentage of what you earn will pay for the product or service to be produced (cost of goods sold) and what rate you want to keep for profit.
Allocate the remaining percentage to operating expenses such as marketing, IT, and employee burden costs like salaries, benefits or taxes.
The projected revenue and the fixed percentages will give you and your team an actual dollar amount to plan around.
3. Only pay for what your team needs to achieve the organization’s goals.
Implement a zero-based budgeting process, which investopedia.com simply describes as a method of budgeting where “budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.”
Instead of merely giving your leaders and team members a sum of money to use their entire year, ask your team to create a budget and request funds based on what they need to achieve their objectives.
Most organizations have leaders develop budgets based on what is allocated for their area. Modern business culture often perpetuates the myth that leaders must spend what’s in their budget so their department doesn’t lose it — or so they can justify getting more the next fiscal year.
Don’t let this type of behavior take root in your organization.