The budgeting process is on the horizon. You might be tempted to add (or subtract, depending on your outlook) 5 to 10 percent to prior year's numbers, call it a budgeting day and focus your leadership strengths on running the business.
A deeper but relatively quick evaluation of your business could be useful, not only to budgeting but also planning strategically and growing profitability. Look at these four elements.
Think about changes that your business will be initiating in the coming year and those outside of your control. These might include:
- Launch of a new product line
- Entry into a new market segment
- Restructuring of pricing strategies
- Adoption of environmentally-friendly cost savings
- Credit terms lengthened or shortened
- Government legislation, influencing addition of healthcare benefits
Study changes in a strategic planning session with your management team or during solitary reflection about your business direction. Project their impact on your financial statements, either before you begin the budgeting process or when you develop the budget.
Your approach to developing sales projections will vary, depending on the depth of your customer base and product lines as well as the structure of your sales organization. For example, if you have a handful of accounts that comprise 80 percent of your business, then ask your key account managers to project their sales or meet with these customers yourself to talk about their needs and buying plans in the next 12 to 18 months. If your customer base is much broader, then ask your field sales managers to prepare sales estimates; analyze trends and project sales associated with categories such as geography, industry, and referral source; or talk with a representative group of customers about their plans.
At the same time, identify sales drivers among your merchandise categories, core basics, trending SKUs, and service offerings, including those services delivered electronically. If your product or service is a big ticket item, evaluate your sales pipeline. Marry your hopes for the coming year with results from prior years to develop realistic projections.
For cash management purposes, get a sense of when sales will happen and when you'll have cash in hand as a result of sales based on factors such as:
- Length of sales cycle
- Credit terms and average DSO
- Seasonal aspects of your business
3. Operating Expenses
Your business might budget expenses based on a well-organized, custom chart of accounts or simply reflect sources of income and expense deductions from a corporate tax return. Whatever you do, consider how various line items can be consolidated to get a holistic view of your business:
- Cost of goods (inventory) or services (freelancers, independent contractors) that are packaged and resold
- Cost of generating sales: advertising, travel, meals and entertainment
- Payroll: salaries, wages, employee benefits (healthcare, lifestyle, and retirement), workers' compensation insurance
- Facilities and equipment: lease of office or distribution space, utilities, equipment rental fee or purchase costs (if expensed, according to tax law), repairs and maintenance, property insurance
- Professional services: in-house and outside legal, technology, accounting, and other services
- Financial services: bank fees and interest on bank loans
Explore how sales and expenses are linked. (For example, are inventory plans lined up with sales projections; are marketing dollars allocated to visiting a key client; will going green save money on utilities; will new pricing strategies reduce sales volume but eliminate the need for contract labor; etc.) Make adjustments to synchronize finances associated with your business operations.
4. Strategic Expenses
Many of the coming year's expenses may position your company for future success but not directly influence sales, service levels, or the efficiency of your back-office operations. These may include costs of research and development projects, legal fees to apply for a patent or trademark, and startup cost of an ecommerce business.
If your company has just obtained a patent and forged a licensing agreement using this intellectual property, then make sure that you reduce legal fees compared to prior years and increase income associated with royalties. Similarly, if the ecommerce business has been launched, plan appropriately for variations in sales and expenses.
Wise Bread is a leading personal finance community dedicated to helping people get the most out of their money. Get daily money tips by following Wise Bread on Facebookor Twitter.
Ask the right questions
When I worked as a staff accountant for an apparel manufacturer, the controller told me that the outside auditors used faulty logic when judging the reasonableness of our year-end financial statements. The lead auditor routinely questioned large increases and decreases compared to prior years. A more pertinent question, according to my boss, would have been to determine why a certain expense item remained flat when the volume of usage had skyrocketed or when the sales that this expense activity supported fell dramatically. Get to know your business, uncover changes in revenue streams and expense structures, and then see if your financial statements (and budgets) mesh.