Burning the midnight oil
Back in my days in the corporate world, my family knew that from the end of September until the end of October I will barely be home. The reason being that by November 1 the next year’s budget needed to be submitted to the board for approval. The process required repeated iterations to find a fine balance between an ambitious-enough growth and reality. The result was usually 8-10% annual growth, a rate that would be acceptable as a target, achievable, and allow me to slightly exceed it to show how good I was…
The companies I worked for had long-term (10-15 years) strategic plans, but did not have actionable ones, therefore so long as the budget followed the “this is what we’ve always been doing” principle, just a little bit more of the same was good enough.
When is started working as a SME mentor I realised that what worked in the corporate world wasn’t enough there – for a small-medium business, 8%-10% annual growth rate is not going to make much of a difference. When SMEs want to grow, they need a 30% growth rate or more, and to achieve that they need to identify true boosters that will catapult them to the next level.
So, the first step in preparing a budget is to identify those boosters. In order to do that you need to run a SWOT analysis to identify the most promising activities or the acutest threats to mitigate. These will be the backbones of your next year’s budget.
Next, you need to calculate the budgetary implications of firing these boosters – what will it take and how much is it going to cost, as well as, obviously, how much more revenue it will generate (or how much costs it will save). Note that as with any substantial activity the costs are immediate, but the benefits may take time to yield. That’s perfectly OK but make sure to time it correctly.
Once you know what the financial ramifications of the selected boosters are you can/need to start the painstaking task of building your budget.
A. Expenses: although your Profit and Loss (P&L) report starts with income, when preparing a budget, it makes sense to first look at your costs. The reason is that in order to be profitable your income needs to be greater than your expenses (duhhh…), for A to be greater than B you first need to know what B is…
So, look at every single row in your expenses and see:
- How much is it going to be affected by the boosters (if at all)?
- Will it need to increase?
- Can you reduce it?
B. Income: similar to what you did for expenses:
- How much is it going to be affected by the boosters (if at all)?
- How can you increase it otherwise:
- New products?
- More clients?
- Increase prices?
C. Cost of goods sold: since this is proportional to sales it makes sense to analyse it only after sales figures are in place.
D. Review expenses: now that everything is in place look at your expenses again and see if, and by how much you need to change them because of the increase in sales. You might need bigger premises, more/different employees, training, etc.
E. Look at the bottom line – does it reach the profitability you wanted? If not, check what else can you do to improve it, but don’t forget that (almost) every action you take on the income side will have an effect on the expenses side, and vice versa.
F. DO NOT forget the little things that might add up – paying recruitment agencies, increase in energy costs, salaries, etc. and add a Miscellaneous row. It will be used.
Everything needs to be done on a monthly basis with the following columns:
- Last year
- Next year budget
- Next year actual
- Budget v actual
It makes sense to have quarterly sums for each of the above, as well as an annual total.
And most importantly – review it every month. It is easy for a plan to get out of whack and if you don’t monitor it regularly, it will.
This may seem like a lot of work, and it is but there is simply no other way to achieve the goals you set yourself. All great achievements are based on the tiniest details.
And it’s worth it – I recently sat with a client company’s management team, when one of them mentioned that in the next few days they were going to get a deposit for a £110,000 project. The comment passed without anyone raising a brow, but a few moments later everyone suddenly realised that 4 years ago this was half their annual revenue. Now it’s “nice to know” but nothing too exciting – it is less than their monthly sales.
Want to achieve exceptional results? Make a budget.
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- Burning the midnight oil - September 20, 2022
- Why don’t strategic plans work anymore (and what does)? - August 19, 2022
