I talk to a lot of business owners every week. It surprises me that more businesses don’t have a budget or as I like to call it, a Profit Plan.
I just spoke with a business owner this week and I was pleasantly surprised to hear him tell me that he had his budget all worked out for 2015. Further into our conversation however, it transpired that will he had listed all his expenses for overhead costs, marketing, salaries and so forth well thought out, he had not included his Revenue projections!
What is a budget? The simple definition is an estimate of income and expenditure for a set period of time. A budget or profit plan includes both projected revenue and projected expenses.
Why should business owners have a budget? Here are 3 compelling reasons:
Achieving your revenue goals
If you don’t know where you are going, you could end up anywhere. If you are shooting for a specific target, you are more likely to achieve it.
It’s not enough to say, I’m planning to double my business next year, or increase by 10% or to have a goal of $1 Million in annual revenue.
How is that Million going to happen? Chances are that every month will not have the same goal, so to just divide $1 Million by 12 does not necessarily make sense unless your monthly revenue is relatively steady month in month out and you are only projecting a small increase in 2015.
What happens if you have a seasonal business? There are bound to be slower months and busier months. You’ll need to project accordingly.
What if you are planning to double your business in 2015? You’ll need to account for a ramp up from where you are performing now to where you project you will be and plan accordingly for increased marketing and increased staffing. Maybe you’ll need to add additional infrastructure in terms of office space, vehicles or equipment.
Planning ahead by making a Profit Plan or budget will also help you to see where you might need to infuse more capital into the business in the form of loans, Lines of Credit.
Hitting your profit targets
It’s important to hit your revenue targets, but it’s even more important to achieve your profit targets. Creating a budget will help you project your profits, so you can evaluate if your plan will achieve the bottom line you need. After all, those profits are necessary to provide additional compensation to shareholders/owners as well as to provide capital for future growth, repayment of debt, etc. By the way, it’s a good idea to create a personal budget, so you’ll know how much you need each month from the business in terms of salary and draws or distributions.
Adding infrastructure to your business
As your business grows, you will need to invest in more infrastructure. This may take the form of adding overhead personnel, for example a sales person, administrative support or a supervisor. Other types of infrastructure could be leasing an office or shop (or increasing the size of your facility) or investing in additional equipment, vehicles or technology.
Creating a budget allows you to try out scenarios to see if your revenue projections will support the investment in overhead. You will also want to plan your marketing strategy (and create a marketing budget!) to support the revenue goals you’ve projected.
As you can see, there are many reasons why it makes sense to create a budget for your business. Beyond being sensible, it really is important in my view to do annual strategic planning for your business. Your budget/profit plan is an important piece of your annual strategic plan.