Once Thanksgiving starts off the string of year-end holidays, it’s hard for business owners to focus on their business. There are holiday team lunches, employee gift cards to purchase and the holiday parties with friends and family. Lots of distractions to clutter the calendar and force us to take our eyes off the ball…
But as the year winds down, owners should have two (business-related) things on their minds – if they can focus. There’s always stuff going on outside the business that distracts us from finishing out the year.
The two things on the minds of successful business owners are:
What can next year look like?
From a financial management standpoint, both are great questions and can set your business up for financial success in 2019. And if you’re up for that spectacular new year, there are three things you need to do.
1. Look Back
Perspective is everything. It’s like that Monday-morning quarterback looking back at Sunday night’s game and going “coulda-woulda-shoulda.”
So what we’re looking at is last year, and your historical information. You know how investment companies’ TV ads always have the disclaimer that “past performance is not an indicator of future performance”? That’s not a valid statement for your company’s financial performance.
Intimately knowing how your business has previously performed in the areas of sales, margins, and overhead expenses increases the repeatability of those results.
One crucial area to know is gross profit (or margin) by customer, by product or by the line of service. Knowing this will enable you to make strategic decisions that add more profit to your bottom line, like selling more of the better-margin products and less of the lower-margin products.
2. Set Targets
Now that you have a historical perspective, you can start looking forward. Using your numbers from the prior year, let’s think about the revenue growth your business can achieve in the coming year.
Once you have that, you can calculate the percentage growth that it represents over the prior year. If it’s in line with your historical growth from an organic standpoint, or special events may contribute to the growth of that business – say, acquisitions, new product launches, or loss of a competitor in the marketplace – you can finalize your revenue targets.
Now just lather, rinse, repeat. Keep applying that same thought process to the different financial pieces of your business, like cost of sales and your overhead spending.
3. Establish a Budget
Congratulations! You did all the heavy lifting in number 2! All that is left to do is to put all those pieces together. If your targets were annual numbers that you developed in number 2, then you’ll want to compute the monthly amounts.
We’re going to fill in 12 little buckets. Please don’t just divide by 12, unless it’s for rent (that’s a Patty-ism). Many businesses have some level of seasonality to their revenue, their cost of sales, and various other expenses. Go back to #1 to review your historical expense spending patterns and revenue patterns.
This results in a budget that mirrors the actual ebb and flow of your historical financial performance. But don’t forget to make adjustments to accommodate those special events you identified in #2.
If you follow this checklist for your business, you’re sure to have a very Happy (Financial) New Year indeed.