Our individual dreams help shape our goals in business. Each person’s individual goals have unique characteristics, and yet they all lead to the same business goal for everyone: success! The key to being successful in business is proper planning. A captain of a ship would never begin a journey at sea without charting the course. The proper plan for a business is just as crucial. Developing, implementing and analyzing your business plan are important steps to achieve success in your business.
One of the most important parts of business planning is preparing and using a budget. A budget gives you a visual statement of the projected financial results of your business activities. Using a budget will assist you in tracking the flow and progress of your business. This information is vital when making decisions about the management of your business. Remember, knowledge is power!
To get that power at your fingertips, your first step is to develop a budget. There are three major components of a budget: projected revenue, the projected cost of expenses and the profit of the business. Your budget should cover a minimum of 12-24 months, and should be prepared by the month. The simplest way to begin your budget is to use your historical revenue and actual expenses in your business from the last two years.
Calculate the revenue increase over the last two years, then add the same percentage increase to your most recent 12 months to obtain your projected revenue for the next 12 months. Adjust this projection to consider changes that will affect the revenue produced over the last 12 months against the upcoming 12 months. For example, you may have added a new employee that will increase revenue over the next 12 months and the additional projected revenue will need to be added to your budget.
- Get help from industry standards to make your projections. For example, according to the industry standard, if you are a dentist and hire a hygienist, the hygienist should be producing revenue at a minimum of three times their salary.
- Identify your revenue in specific income categories so you can monitor the progress of each revenue stream separately. You may identify an area where a fee increase is needed.
- Evaluate your time and how it is best spent. You could retain an accountant to do the bookkeeping work that you are currently doing. This should allow you to increase your hours to produce revenue.
Use the expenses from your business over the last 12 months as your base budget. Review each expense category separately to consider any changes that will affect the expenses for the upcoming 12 months. For example, you may need to add the cost of a newly hired employee to your salary expenses, as well as increase your employer payroll taxes. Your repairs and maintenance expenses may need to be decreased if you recently replaced older equipment that required costly repairs.
Keep a close watch on the most expensive overhead costs, which are generally supplies and staff salaries. Salaries, generally, make up approximately 20%-25% of the overhead with 10% or more being apportioned to the staff. Set systems in place to help control costs, such as adjusting staff schedules to eliminate or minimize overtime.
Monitor production of revenue in comparison to the salary costs, so you can base raises on production. If your employees know their next raise is being determined by their production, you should see their production increase.
Evaluate your current marketing plan to determine what methods have been successful. If your increase in marketing costs last year resulted in increased revenue, you might want to adjust your current marketing plan to put more effort in the method that is producing results. Include these adjustments in your budget.
Finally we reach the most enjoyable part of your budget: your profit! The name of the game is making that number grow! Take the time to set goals for your business to increase the profit. Identify the many ways you can use your budget to increase revenue, control costs and increase profit. Can you reduce supply costs by putting inventory controls in place? Can you increase revenues by increasing productivity with more efficient office procedures or equipment?
Each month you should review your budget against your actual numbers for both revenue and expenses. You should update your budget monthly for the next 12-month period using your review of the current period. This helps you maintain an accurate budget as your business progresses.
The end result should be knowledge to help you achieve success and reach your goals. The stronger your budget becomes, the more financial power you will have in your business.
If you would like more information regarding how to budget for your business or any other topic, please contact Henssler Financial Tax & Accounting Division at 770-429-9166 or [email protected].