Information that can help you guide your business
This time of year, there is one sure thing in the general media; articles in the newspaper and stories on radio and television that are asking people about their New Year resolutions. Somewhere out there, the media can even find experts that can be interviewed and quoted to tell us about the benefits and the hazards of a person taking the time to make a New Year resolution. You can count on the ads touting the advantages of your joining a fitness center and also your making a trip to the local office supply business to get yourself better organized.
What does that have to do with you running your business? This article is going to tout the advantages of you making a New Year resolution of developing a budget for your business for the coming year.
When asking the owner or manager about their expectations for the new year, you would expect to hear statements with regard to “increasing sales” or “better controlling expenses” and “making more money”. All of these are good, but the challenge begins when we ask that same owner or manager, “How much? How much of an increase? How much better? How much more?”
And this is where the challenge comes in because the owner or manager is not likely to be able to give a number to quantify their statement of expectation. This is where a budget comes in. The budget should be created and placed aside the monthly profit and loss statement so that we can see whether or not the business is on target to meet those goals.
Imagine the person that states their New Year resolution is to lose twenty-five pounds. Throughout the year the resolution is likely forgotten. Around Thanksgiving this individual gets on a scale to find they have lost only five pounds. If, in eleven months they have lost only five pounds, what will be their chances of losing another twenty pounds with all of the holiday season before them?
Imagine a second person with the same goal. This person also gets on the scale, but does so on February first. They find they have not lost any weight but instead of gained three pounds. While their goal is now to lose twenty-eight pounds, they do have eleven months in which to adapt their eating habits so that they achieve their goal. And if this person makes a point to step on the scales on the first day of each month, they are more likely to be able to adapt their eating habits to the goal they have established.
The budget for your business is the same thing. It is your written plan for what you expect to happen for the next twelve months. Creating a budget is a fairly simple task. It does not require a CPA, accountant or even a bookkeeper. Instead, the only requirements are a pencil, calculator, copies of your last twelve profit and loss statements, and a small amount of your time.
Begin with the profit and loss statement (also known as the income statement) for the month of January. Lightly draw a line through the number that represents the sales for that month. To the right of that number, write what your expectation is for sales for January. It is a guess, but it is your educated guess.
Look at your gross margin from last January. Do you anticipate you will sell more merchandise with a higher or lower margin? Draw a line through the margin from last January and write what you expect for a margin for this January. Multiply that margin by your anticipated sales and you will have your gross profit for the upcoming January.
Now continue the exercise on a row by row basis for each of your expenses. As you total each of the expenses you will have your anticipated total operating expenses. Subtract that number from your gross profit and you will have your target net profit for January.
Continue this exercise for each of the remaining eleven months. However, make a point to not take the easy way out by saying that you expect a sales increase of a certain percentage for next year and simply multiplying the current year sales by that percentage. While you could do the same for the expenses, the suggestion is that you do not and instead take the time to give a critical look at each of the rows of expenses for each of the months. Doing so will require you to become more involved with your business and not only question your expenses, but you will be asking yourself some serious questions about each of the details of your business.
As you complete these new budgets for each of the twelve months for the new year, you will find that you will no longer answer the question about your expectation for the new year by simply stating, “selling more at higher margins and better controlling expenses”. Instead you will have a detailed plan of what is expected of your business. And when you step on that “scale” at the first of each month, you will have the opportunity to examine what your plan was, what is the variance from your plan, and how to take advantage of the newly found information which is your game plan for this year. Following these directions will be a sure recipe for a healthy menu for your business.