Operating a successful business is hard work. It takes sweat and planning and involves much more than making, marketing and selling your product or service. Have you and your executive team mapped out what success means to you in 2017, both operationally and financially? How does that picture differ from what you’ve experienced or planned for in 2016?
Perhaps, your success means selling a certain number of widgets. Or maybe it’s maintaining a certain profit margin for each widget. However you define it, having a detailed, defined budget that you refer to for guidance and adjust regularly with your real numbers is critical to your ability to reach your goals.
It’s never too late to start.
Budgets are much more than multiple pages of dollars, cents, and charts. They’re structured guidelines that provide a detailed breakdown of your potential/expected dollars and cents and give you a picture and direction in terms of your income and expenses.
According to Statistic Brain, 50 percent of new companies fail in their first four years. Forty six percent of those surveyed list “incompetence” as their number one reason, and their specific incompetence pitfalls include, living too high for the business, lack of planning, and no knowledge of pricing.
Without a budget to refer to for guidance, companies move forward blindly and suffer those same experiences, often avoiding decisions or making them “just because,” with no real information to back them up. Your budget identifies, with numbers, those things that are critical to your success, including available capital, upcoming expenditures, and potential revenue sources. They’re also a strong way of measuring actual performance against expectations.
Why your business needs a budget
Most likely, what you need to meet your goals in 2017 differs from what you needed this year. And those needs are probably going to cost you more next year, too. Do you know how much more and in what areas? How will you cover the additional expenses? Perhaps you can spend less in certain areas, like raw materials or new software, or maybe you’ll need a loan. How can you know for sure unless you have accurate, easy to access numbers to review?
Your operational planning for 2017 should include a review of how you did financially in 2016. You’ll also want to explore your 2017 growth opportunities and the costs associated with each, in areas such as marketing, sales, production, engineering, and human resources. Will you need 15 new employees to meet your third quarter 2017 production goals? How will you cover their salaries? Are you buying a new piece of equipment to support your increased production? Where will that money come from?
Budgets allow you to keep an eye on the big picture. Looking at all of your critical numbers in one place against previous years or quarters provides early warning signs and red flags and the opportunity to make adjustments before the problems become unmanageable. What if the price of one of your raw materials is going up toward the end of 2017, but you didn’t adjust for it? How would that affect your profits?
Creating your 2017 budget
Once you’ve had a chance to digest your third quarter results for 2016, it’s time to focus on 2017. Keep in mind that your budget:
- Should support your company mission and vision as well as your values, goals, and objectives; and
- Is useful only if you review and update it regularly. A budget that you review only at the end of 2016 and recopy for 2017 won’t be very helpful. It should be adjusted as necessary to reflect changes to your business plan, as well as changes in the economy.
What’s part of your budget?
Even if you had a budget this year, and you’re using it to create your 2017 budget, it’s not wise to assume that you’re still including all of the right information. Take a look at your structure each year to be certain you’ve included all of your necessary areas.
There are a number of ways to set up your budget and break down your costs. You can split your budget by cost center, by product, or perhaps by code. Choose the method that works best for you and is the easiest for you to monitor. Only if it’s straightforward to use will you a) refer to it and b) easily identify areas that are overachieving and others that are underachieving in order to make the necessary adjustments.
You should be tracking these year-over-year:
- Variable costs– items like raw materials, salaries, benefits, equipment, commissions, overtime, and marketing dollars fall here.
- Fixed costs– these are those expenses that don’t typically change during the year, like insurance and rent, property taxes, utilities, and costs related to technology.
Have you thought about these?
- Sales—broken down by each product or service you offer;
- Debt—have you borrowed money? If so, you’ll have expenses associated with your outstanding loans.
- Taxes —what did you pay last year, and based on the changes you anticipate to your company’s income, what do you expect to pay this year? Are you paying in one lump sum or are you making quarterly payments?
Should you be watching any of these?
- Projected cash flow—the cash you have to use when necessary, for times where you may need an influx of dollars;
- Revenue projections—these are based on your past performance, as well as your projected growth.
- Targeted profit margin(s)—you’re in business to make money, right? With this number (which you may decide to break down by each product or service line), you can troubleshoot your projected costs and see where you can adjust to increase your profits.
The big budget picture
Budgets are not quick one-page documents you pull together in a few hours. They’re the output of hours of research and conversations by you and your executives. Having one allows you to plan effectively for your company’s future by reviewing its past performance. They also force you to think about your company’s financial (and competitive) position and how you can improve both.
Managing your budget effectively requires constant monitoring and control, to track every financial movement you make and its outcome. All of this happens, of course, while you remain focused on delivering the quality products and services that meet the needs of your customers.
At MKS&H, we remain focused on helping our clients keep track of their bottom lines, through our suite of accounting services. Contact us for input and direction on your bottom line, for 2017 and beyond.