I meet a lot of people who say they can budget.
It’s funny, because their definition is one aspect of it— and it’s usually the top line. They’re the owners with a sales target in mind for the year, or maybe a dream number for the year. They’ve always wanted to be at $15M in revenue, so they use that number.
But where are you today?
How are you going to get to $15M?
What was last year’s sales level?
If you’re currently at $12M and want to get to $15M, you have to have a plan for that.
Do you know what goes into $12M? Do you know what it takes to go from $12M to $15M in terms of level of expenditures? Do you have the capacity for that from a human capital and equipment standpoint?
Can you really do $15M? Often what happens is that I look at the facts and say, “I’m not sure that you can.”
Maybe you’re the owner. The rainmaker. The company’s chief salesperson since its inception. That’s fantastic, but I think a lot of the time that can mean that you have unrealistic expectations in terms of how that revenue jump is actually going to happen. To get from A to B, to get from 12 to 15, you need a solid plan— a budget.
There are 3 key things to consider when you’re budgeting:
1. Pick a number. I find that a lot of time, people in small business-land just pick a number but don’t know why. It can be emotionally driven, which isn’t a bad thing. But if you don’t have a plan to get there or an understanding of the level of investment in the business required to get you there, then you will run into problems.
What kind of employees do you need? Not just the number of employees but what skillset? What kind of people will allow you to reach your next big level, whether that’s doing the selling or freeing you up to do more of it?
But don’t forget, there are more numbers to choose than just one. We’re focusing on the top line number for this article, but of course there is the rest of the profit and loss statement, the bottom line, and cash flow to consider.
2. Understand your sales cycle. In a cyclical business, you can’t just pick a sales number and divide it by 12 to decide your sales targets for the year. Ah, if it were only that easy…
The sales cycle is really important from a budgeting standpoint because there are going to be ebbs and flows in the cash coming in and the cash going out to run your business. If you have a sales drought, what will you do with your fixed expenses? How will you pay for your investments in the additional capacity required to expand your business? How will you fund the advertising required to get your message out to people that may buy your product or service?
Understanding the sales cycle and all of the answers to these questions is critical to putting a budget together that’s optimized for success.
3. Don’t forget about cash flow. Cash flow is a huge contributor to the ongoing success and viability of your business. You can have a positive bottom line and no cash. You can have a positive gross profit, but no cash. You can have strong sales, and still no cash.
Make sure you consider all types of expenditures in this plan when you budget. You not only need enough cash to repay loans, but also to be able to expand your business if that’s what you’re looking to do. We’re talking budgeting around a certain increase to get your number, whatever it is. What kind of capital investment will that require? Equipment, vehicles, expansion of your workforce? More money for advertising? More space for your larger workforce? New vendors with up-front terms?
I cannot emphasize enough the importance of this question: what kind of cash is required to expand your business?
So. Do you still think you know how to budget?!
These are the top 3 things to get your budget started…but there are many more. When I work with clients, I sit down and interview the owner. I ask all the common business questions for budgeting. I also ask specific questions driven by their industry, or their go-to-market strategy, or other unique aspects of their business that may require certain things to happen or be accounted for in their budget.
But know this: budgets can’t be static. They will evolve and change with the business. Think of them as a roadmap to say what is possible given a certain set of circumstances and assumptions.
My recommendations to business owners is this. Always focus on revising the budget or having a rolling version of it with a forecasting mechanism to keep tabs on what decisions worked well and what decisions didn’t really pan out for the business. Then we can decide what adjustments to make.
If you’re reading this and realizing there were questions you couldn’t answer, or you need answers, or you need help, or you know your budget is not what it should be and you don’t want to take more time away from the things you’re good at to try to figure it out— call me and let’s talk about a real budget.