Budget

Creating a good plan and budget for your company starts with knowing – or at least forecasting – the amount of sales you expect for the upcoming year.

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Show Notes

Entrepreneurs need to do a healthy dose of planning in order to anticipate their resource needs during the year.

Creating a good plan and budget for your company starts with knowing – or at least estimating – the amount of business you expect for the upcoming year.

The best place to begin to gain that knowledge is to create a sales forecast.  In today’s episode, we are covering the Planning part of Lisa’s 5 P’s.  Lisa is going to help us understand sales forecasts and some forecasting methods. She’ll also discuss how to begin planning and putting together a sales forecast. She also talks about some factors you need to consider as you estimate your sales for the upcoming period.

Key Points

*The level of sales drives the other areas of your business such as staffing, manufacturing, inventory and facility needs. The ability to develop budgets for those needs relies on estimating the amount of sales you will bring into your business.

*While it’s difficult to be 100% accurate in a sales forecast, the more you learn about your business, market and customers the better you will be able to forecast over time.

*Methods of forecasting can vary from industry to industry and business to business.

*Newer businesses with less history need to rely on other factors to develop a forecast including things like the market, competition, industry and economic trends as well as their own efforts for marketing and promotion.

*Sales forecasts can be affected by a number of factors including human factors. Personalities can play a role especially if your forecasts rely more on your sales people than on trends and other market information.

*Entrepreneurs need to be aware of how the sales forecasts and human factors relate to quota establishment and performance.

*The key people involved in developing your forecast are sales, marketing, your customers as well as someone who can review and analyze the information and provide some independent analysis based on all the inputs.

*Your business model and your sales process or funnel plays a big role in developing your sales forecast.

*Building a sales forecast requires you to define what the steps in your sales process means in terms of sales success probability.

*Entrepreneurs need to be wary of other factors affecting the forecast including things like the economy, industry predictions, regulatory factors, customers and repeat sales as well as prospects and sales person past forecast performance.

*Lisa also talks about tools that can aid in forecast preparations but cautions on how the tools are only as effective as the commitment of the sales team to the sales process and the related information as well as to the flexibility of the tool itself.

Resources and Links

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

Sales Forecast Template Explainer Video to get a link to the video, follow this link to sign up to our newsletter, Prescription For Success!

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Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

This episode will explain how a budget can help you plan your spending, avoid surprises, track your performance and why it is so important in a growing business.

To listen to the episode hit the play button.

To download the episode, right click on this link  and choose Save Target As.  Go to the folder where you want to save the recording on your device and click Save or Enter.

Make it easier to get upcoming episodes by subscribing to the show on iTunes . Subscribing to the show will automatically download the episodes on your preferred listening device so you can listen to them when and where you want. And hey, if you like what you hear, please leave the show a great rating and review while you are there on iTunes.

Show Notes

Healthy Business, Healthy Profits is focused on the challenges of managing a healthy profitable business.  One tool that helps entrepreneurs do that is using a budget to plan and manage their spending in order to achieve their goals and strategies for the upcoming year.  In this episode, we will talk about 2 of our 5 P’s – Planning and Profit.  The episode focuses on how a budget can help you plan your spending, avoid surprises, track your performance and why it is so important in a growing business.

 

 

Key Points

*Rapidly growing companies are going through much change and a budget helps them manage that, consider different scenarios and provide a guide for spending throughout the year.

*Companies can run into problems like spending not aligned with strategy, bad spending decisions and misaligned expenses against revenue.

*Lisa shares a few examples from her own experience of how having a budget and monitoring a budget helped a company shift when things did not go as originally planned.

*We discuss the types of different budgets and when companies should start using and formalizing their budget.

*We cover tips for entrepreneurs as they first start to develop a new budget for their business and when department heads need to become part of the budget process.

*Lisa provides some factors that are important for creating a good working budget as well as some things to avoid.

*We’ll hear Lisa’s opinion about whether compensation should be tied to achieving the budget numbers for the management team.

*Once an entrepreneur has a good budget and process, we share tips on using and monitoring the budget in order to help manage your business.

Terms Used in this Episode

Static Budget – a budget that a company creates and does not change during the year.

Flexible budget – a budget that is flexible or changes in the amount of business that is experienced by the company.

Rolling Forecasts – a budget or forecast that accesses the future estimates of business in increments such a quarterly. It typically initially set up for a period of time such as 12 or 18 months and each increment (i.e. each quarter) is reviewed and adjusted reflect new information and future estimates going forward.

Lisa Roberts is a business operations specialist who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

Sign Up to Get Updates

Get all the updates and information Lisa shares from Business Rx and the Healthy Business Healthy Profits show! You’ll get information, tips and strategies on growing a healthy successful business. Don’t worry, I won’t bombard you with emails.  At most, you’ll get something from me every few weeks. You can sign up  Here

With the holiday season upon us, everyone is running full speed checking off their gift lists. If you own your own business, you have other management lists that you need to check off so that you can end the year and start the next off strong.

We hear 12 days of Christmas this time of year, well here are 12 Steps of Year End to help get you started. Some of these will need to get done by or at year end, but most can be done after.

So off you go.

1) Complete Your Books and Records -make sure all your transactions are captured and recorded properly before you close the year. Don’t forget to make sure your business expenses are kept separate from your personal expenses.

2) Physical Inventory – if your business has inventory, do a physical inventory count at the end of the year and reconcile the counts with your computerized records.

3) Tax Statements – get your 1099’s and your W-2’s completed and sent out by their deadline – January 31st.

4) Employee Reviews -take time to sit down with your staff and perform reviews so they know how they’re performing and how they can improve. It’s also a good time to thank them for their hard work this past year!

5) Reconcile Accounts – once the year is completed, reconcile your bank accounts and your credit cards to make sure they are in balance with your books. (For good financial management, this is something you need to do every month, not just at year end.)

6) Auto Mileage – If you record your auto business usage using the standard mileage rate, make sure that you are using the correct rate. And while you’re at it you can set up your systems for the upcoming year. Check the rates here at IRS.gov site http://www.irs.gov/Tax-Professionals/Standard-Mileage-Rates

7) Financial Reports and Results – once your year is done, your expenses recorded in the proper year and your business and personal expense separated, print out your financial statements to review your results. Also, look at your key business ratios to see how your business is performing and what areas you need to focus on for next year.

8) Budgets and Goals – finalize your budget, goals and objectives for next year so that you can start the year strong and focused.

9) Call the Accountant – get in touch with your accountant to see what they need from you to prepare information for your tax filing.

10) Prepare for Your Advisor Meetings – make a list of questions for your accountant or other advisors about regulations and new laws that may affect you in the year going forward so you can plan for the upcoming year.

11) Annual Reports and Fees – make sure you file your annual report, if required by your state by the deadline. Here in New Jersey, they’re due on the last day of the month of the anniversary of the company’s formation.

12) Reflect on the Year – take some time to clear your head and review how things went for your business. Pat yourself on the back for those things that went well! Learn from those things that didn’t go so well. Don’t dwell, learn!

Good luck checking off your business management list so you can close out your year successfully. And best wishes for a great holiday season to you and your family.

Mid-year is halftime for your business.  A good time to review results to see how you’re doing.  It’s also a good time to adjust your game plane if necessary.

Think about halftime of a football game. To some degree, everyone involved is analyzing, regrouping and recharging for the second half. Fans in the stadium are chatting up their team’s great plays and analyzing any missteps so far. The commentators take a break from announcing the action to analyze the first half and offer opinions on how each team needs to play in the second. In the locker room, the teams are resting, getting hydrated and recharged so they can get back out there. Based on their analysis, the coaches are directing the team about what they need to do for the rest of the game to win.Mid Year review halftime

Business owners should make use of their halftime too. Back in December’s Post Year End Planning, we talked about planning your goals, budgets and action plans for the upcoming year. With mid-year approaching, you should schedule some time reviewing how you and your team are performing against your financial and operational plan.

What’s the Score?

I trust that you’re keeping your books updated and you’ll be able to produce and review your six-month profit and loss statement and balance sheet. How do the financials look? Are your sales on pace for the year? Are your expenses in line? Is the business profitable? Do your important financial ratios look in line? Halfway through the year is a good time to analyze your numbers to determine the health of your business.

While small business surveys have fluctuated in recent months, optimism for small businesses is generally higher than it was four years ago. While many businesses see some growth, there is still uncertainty on the horizon.

So how do you feel? Now is a good time to analyze what is going right and what is going wrong. If your business isn’t hitting the sales targets, are there things you can do to regroup and refocus your efforts? Are your expenses coming in higher than expected? Can you adjust so you can maintain expenses and build more profitability? How’s your cash flow? Do you need tighten up your cash management plan?

Review Your Financial Playbook

Your budget is much like a financial playbook and it can help you manage your business’ spending more effectively. Don’t forget to review your actual results against the budget to make sure that you are managing your money effectively and staying on track. That goes for both the sales and expenses.

The craziest and most frustrating argument I’ve ever had as a financial controller was about a 6-month budget to actual analysis. The argument was with a colleague heading up a division. His sales for the first 6 months were off by 75% but he still thought he should be able to spend 100% of his expense budget. I said, “Ah, no! You see, there is this little thing known as profit.”

Sometimes you have to review, regroup and, every now and then, readjust your spending when the circumstances change from what you had originally forecasted.

The Operational Game Plan

Six months into the year is also an ideal time to really review and analyze your annual operational game plan – the goals and plans you made for your business back in December. The projects that you undertook, are they complete? If they are long term, are they on schedule? If you had plans to hire more people, are you focused on those recruiting efforts? Did you have plans to improve an area of your business? Are you focusing on that or is it something that you’ve let slide over the last few months? What changed? Is it still inefficient and needs to be fixed? Are you making sure that your staff remains focused on your operational priorities and guiding them when needed?

Another recent survey, listed time management as the #3 most identified thing that keep business owners up at night (#1 was generating new sales and #2 was expenses eating into profits). If you’re in a time crunch, can you figure out what the problem is? Are you focusing on the most important things in your operations? Maybe there are things you can delegate to free up some of your time. Are you trying to do everything yourself when someone else could easily take over that task?

Management guru Peter Drucker said, “Time is the scarcest resource of the manager; If it is not managed, nothing else can be managed.” Use your own halftime to analyze the tasks and the time you are spending in your business and find ways to manage your time more effectively to spend time on your business.

“Don’t give up at halftime. Concentrate on winning the second half.” – Paul “Bear” Bryant.

Take advantage of your business halftime. Take a step back and analyze your “play” in the first half, regroup and recharge so that you can focus your energy to hit your numbers, maintain focus on your operations and achieve your goals.

Now go out there and win one for the _______________ (enter your business name here)!

And have a great second half!

Well, here we go again. Each of us is dashing around planning for the holidays while also trying to plan for the next year in our businesses. I think this is the time of the year that I have the most “to do” lists going at once. As I whittle down my gift list, I, like many of you, are working through the year- end business list of things to do.

How does yours compare to mine?

Financials

To wrap up the year, I am in the process of getting my books in order so that I can prepare my year end reports to track sales, profitability and expenses. I have already had a call with my tax accountant to go over year-end tax planning but we also discussed what may happen in next year given the state of affairs in Washington DC. Yikes, what a mess they are making with our business planning this year!

Action Plans

I am also putting my plans together for marketing, operations and sales. The marketing plan includes things I plan to do in next year for promotion, advertising, marketing content and even in networking activities. While I do not plan on doing any hiring, your company may be considering whether adding staff could propel your business further. Operationally, you may be considering investments in capital and equipment that you may need to enhance your business or you may be reviewing your expenses to see if there are changes you can make to save costs.

Goals

While I am organizing my financials and action plans, I find that I begin to think about next year and what I want to do for my business. This is when the goals for next year start to take shape. I like to think about these as long term aims that drive focus and give me something clear to strive for. They might be related to growth, profit or even service. Make sure your goals are clear though. It shouldn’t be that you are going to make more sales; it should be we are going to increase sales by 10%. If you have staff, involve them in the process so they have an increased sense of ownership and understanding in the direction the company going forward. They may also have some great ideas of their own.

Budgets

Now that you have your current financials just about complete, your action plans in place and goals for next year, you can summarize the affects in your budget. Your budget can help you manage your business by prioritizing the spending for next year and it can also help you to prioritize the Action Plans and Goals that you have set for your business.

Muddy Waters from Washington

Taxes, the Affordable Care Act and the regulatory climate can all have a greater impact on your business in the coming year. Here are a few things you should be considering during your planning for the end of year.

Taxes

Our lawmakers continue to bicker about what is right for the country when it comes to debts, deficits and taxes. Since many small businesses file their tax returns as individuals, tax decisions by lawmakers may have an effect on taxes for some employers. You’ll need to plan and budget for these any tax changes in the coming year. It is a good time to consult your tax accountant to see how new tax law changes could affect you in the coming year.

Health Care Costs

The Affordable Care Act contains about 2400 pages and the regulations that go with it will ultimately take up several more thousands of pages. Changes and delays in certain requirements have also made this law more confusing for businesses and individuals alike. Business owners should work with their advisors and insurance providers to understand how this will impact them operationally and financially in the coming years so they can plan what is right for their own business and financial situation.

Regulations

The government imposes regulations that impact business in several ways including economic, environmental, OSHA and tax compliance and these can be costly to small businesses. In fact a study done by Lafayette College for the Small Business Administration Office of Advocacy back in 2008 revealed some of these costs.

As of 2008, small businesses (defined as fewer than 20 employees) showed that these firms bore the largest cost of regulations per employee at $10,585 or 36% higher than larger firms. For medium sized firms, defined as 20-499 employees, that cost was reduced somewhat to $7,454 per employee. With so many regulations, it is very difficult for business owners to keep up with them all. The Small Business Administration has a site that can help you get started http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/understand-business-law-r . Because regulations can be complex, it is also a good idea to consult your business lawyer or other advisors if you have questions.

Best of luck getting through your own to do list this year and happy planning!

How’s business?

This is a question business owners get all the time. To be able to answer that question, a good objective review of your business results will help you to answer. This post will give business owners some good practices to put in place to help them stay on track toward their goals, effectively analyze and measure performance and find opportunities for improved business results.

Many entrepreneurs I’ve met are working so much in their business that they never stop to take a hard objective look at it. So many of them work in their business and not on their business that, at times, they fail to see something coming that may disrupt and challenge their business’ very existence.

Here are some good practices that you can do each month or quarter in your business to help you to stay on track toward success.

# 1 Financial Results for the Period

To understand how well your business is really doing, you cannot just look at sales. The biggest part of you business results are in the financial statements. Many business owners, especially in the beginning, make the mistake of thinking that if sales are growing then everything else will be okay. This is not always true since sales have to be profitable and create sufficient cash flow to meet the needs of the business. If you are waiting for your accountant to produce your financial results several months later, you may be missing opportunities to take proactive steps in your business to find cost savings, reduce taxes or identify unhealthy trends in your business.

#2 Comparison to Prior Periods

A good way to determine how effectively your business is performing over time is to review your results with prior periods. This will help you to identify areas where you have improved and also areas where you have declined such as the sales of a particular product or service line. It can also help to reveal problem areas in costs and expenses. Once identified, these areas can be investigated and you can begin to look for ways to find savings.

#3 Comparison against Budget

You did do a budget for your business right? Some businesses don’t believe in using budgets. If you are one of them, congratulations, you must have an endless supply of cash. Of course, most businesses do not. Budgets don’t have to be difficult if you understand your results. They can be easy if you have been in business for a while since you already have a baseline to build from. A comparison of your results against your budget can identify areas where you haven’t been as efficient or effective as you had planned and can quickly provide you with the information to take action. It can reveal unplanned trends like we have seen with fuel prices over the last several years. It can also help you reset your priorities if results or circumstances change.

#4 Sales Forecast Reviews

At regular intervals, monthly or quarterly, it’s a good idea to take a look at how you are performing against the forecast plan that you set at the beginning of the year. Are you sales coming in as expected? Are there areas where you can increase your efforts with existing customers to increase sales? Are you increasing your opportunities with new prospects with your marketing and sales efforts? Companies often must plan investments in labor, promotions and products based on how well they believe they will perform in the future. A good business will review results against forecast so that they can make changes to their approach if things are not going as planned.

#5 What’s working and what’s not

Most growing businesses have new projects going on all the time. It may be a new product offering, a hiring push, a marketing effort, a new large customer or an effort to improve efficiency in a certain area. Projects like these need to be reviewed as they proceed to make sure they are working as planned. It is a good idea to step back from time to time during these efforts to determine results so far, what is working and what is not so you can make changes or pivot before too much time and cost is spent.

#6 The Challenges You’re Facing.

Companies face challenges that disrupt the flow of business and sometimes threaten profitability, operational efficiency, employee morale or a host of other things. Just as we recommended above in reviewing projects, strategies and financial information, it can be helpful to analyze the challenges that your business is facing. Many of the internal challenges that companies face can be broken down into three categories and they are people, processes, and systems. Other factors are external, but can affect your business as well. These can be factors like political, economic, social, technological, environmental, and legal. Periodically, it is a good idea to review any internal or external factors that could affect your business and take action to address those before they become a problem.

Get into the habit of reviewing your business results on a regular basis. Take time to objectively review your results, determine if you are on track and ensure that you are managing the business priorities to pave the way to success.

Over the last few years, the uncertainty in the economy and in business has been a challenge for weak companies as well as strong ones.  These challenges should have taught us that having a budget, monitoring results against it and being in a position to react to changes are extremely critical. A business tool that helps many companies manage operations is the use and controlling of budgets.  Many view budgets as a way to control costs and that is true; but it also can be used to monitor revenues as well.   Having an early view of revenue and sales trends can provide timely insight into managing costs. After you have thoughtfully put together your annual budget, you must monitor it closely so that you can make modifications in your business as events and financial results warrant.

To control your budget, consider using the following steps to understand where you stand financially as well as gain information to form the basis for decision-making and action in the future.

Have a Good Understanding of the Facts and Figures

To effectively develop and use your budget, you need to understand the basis behind the numbers. This includes the assumptions used to formulate those numbers.  This will be critical in quickly identifying any changes in those assumptions as money is expended in your budget.  You also need to recognize the difference between controllable and non-controllable costs.   A rise in taxes, commodity costs, and fuel prices may have an adverse effect on your budget by causing overages in your personnel, materials and delivery cost in your business. Unfortunately, you may not be able to control these costs and your budget will take a hit. Conversely, you may be able to control cost such as office supplies, advertising, or travel and entertainment.  Understanding the assumptions behind the numbers will enable you to identify what actions you may be able to take in anticipation of a change in costs.

Monitoring and Early Warning Systems

Once you have a solid understanding of the figures in the budget, set up a system of monitoring actual costs against the budget on regular basis to recognize the early warning signs that your numbers may be off track.  By reviewing the figures monthly, you will be able to catch signs of trouble in your business sooner rather than later.  Your review should also include revenue items as well.  If your sales are off track from what was forecasted, this may mean there is a problem with your products, your sales process or your marketing efforts.

Study Variances

Monitoring your budget will pinpoint variances from your actual results to your planned numbers.   The variance may be a negative variance in which you spent more than you budgeted.  A positive variance will indicate that you have underspent the budget.   Once you identify the variance, investigate the cause.  A negative variance may indicate a one-time unavoidable expense or that a negative trend is developing that may require action.  A positive variance may be good because a cost has come down or it may indicate trouble because something was missed.  For example, positive variances may be an indication that a critical project was missed, a key position was not hired or that important marketing plans were not executed.

Take Corrective Action

After you have identified the variances in the budget, take action to determine options for corrective measures.  It‘s possible that a budget item must be changed as in the case of rising cost that was not anticipated or controllable.  For some variances, you may need to take action to bring the cost back in line with the original budget.  In these cases, you may need to take steps to renegotiate with vendors, cut costs elsewhere, or delay expenditures or projects.

Running a business poses many challenges not the least of which is some level of uncertainty.  Limit that uncertainty by managing your business using these steps to control your budget.